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I’ve always argued that creating a sound financial
plan can be extraordinarily simple, even though some
in the financial-services industry try to make it
complicated. Yet even those determined to create a
simple, streamlined plan run the risk of stubbing
their toes, often by running afoul of the Internal Rev-
enue Service’s often-byzantine rules governing
tax-sheltered savings vehicles.
Here are six financial-planning “goofs” as well as the
steps you can take to be sure you avoid them.
Goof 1
| Missing an RMD
Individuals with assets in Traditional
IRA
s and
401
(k)s
must begin taking required minimum distributions by
April
1
of the year after the year they reached age
70
1
/
2
. The basic idea is that even as the government
allows people to enjoy tax-free compounding on their
money while they’re in the accumulation mode, at
some point the
IRS
wants its cut.
The penalty for not taking your
RMD
s on time—once
you’ve started them, you need to take them by Dec.
31
of each year—is so steep it’s the stuff of legend:
You’ll owe not just the ordinary income tax on the
distribution, but a
50%
penalty on the amount you
should have taken but didn’t. The
IRS
allows you to
appeal the penalty if the missed
RMD
was the result
of an unforced error, such as if you were incapaci-
tated or you simply forgot. But you probably still want
to avoid that rigmarole if you can.
The Avoidance Tactic:
Savvy investors can be stra-
tegic about which accounts they pull their
RMD
s from,
to make sure they comply with the tax guidelines
while also taking the distribution that makes the most
sense from an investment standpoint. I like the idea
of weaving
RMD
s into the rebalancing process, pulling
the distribution from whichever funds or stocks you’d
like to reduce anyway.
But if you’re concerned about missing an
RMD
,
especially if you’re an older retiree who’s looking to
simplify and automate, you can also set up auto-
matic
RMD
s with your brokerage firm or mutual fund
company. You’ll typically have the opportunity to
receive distributions on a monthly, quarterly, or annual
basis. If you go this route, make sure to maintain
a cushion of liquid investments (cash or a short-term
bond fund) so that the provider doesn’t have to
pull money from a long-term investment when it’s at
a low ebb.
Goof 2
| Not Signing Up for Medicare at Age 65
Many retirees have gotten religion about deferring
Social Security past their full retirement ages;
each year of delayed filing for benefits, up to age
70
,
results in an
8%
bump-up in benefits. But if that’s
your strategy, it’s still important to sign up for Medi-
care at age
65
. If you don’t, your Medicare Part
B premiums will be permanently higher—and will
increase for each year you delay—than would
have been the case if you had signed up when you
should have. Medicare Part B premiums will be
50%
higher for the person who waits until age
70
to
sign up for Medicare.
The Avoidance Tactic:
To avoid those higher
premiums, plan to sign up for Medicare coverage
three months prior to your
65
th birthday, regard-
less of when you plan to begin claiming Social
Security benefits.
Goof 3
| Not Updating Beneficiary Designations
Perhaps you made your brother the beneficiary of your
401
(k) and then got married two years later. Or maybe
your husband was the beneficiary of your
IRA
, but
now he’s your ex. In such instances, what’s on your
beneficiary designation forms will stand regardless of
whether it reflects your wishes, and the beneficiary
designation will likely trump what’s laid out in other
parts of your estate plan, such as your will.
The Avoidance Tactic:
It’s a good idea to revisit
your estate plan from top to bottom every
10
years.
But if you have a major life change in the intervening
years, such as a marriage or divorce, that should
be a catalyst for checking up on every aspect of your
Avoid These 6 Portfolio Goofs
Portfolio Matters
|
Christine Benz
