Someone once said that a plan is just a list of things that don’t happen on the schedule you desire. This same idea can be applied to retirement plans. Retirement is not a trendy, elderly lifestyle plan as depicted in popular culture. It is a living expense fund that must last throughout the entirety of retirement. Avoidable retirement plan errors can force many retirees into desperate situations in the most vulnerable times of their lives.
One of the biggest errors is not planning for retirement at all.
About 22% of Americans have less than $5,000 saved for their retirement. Over 46% have nothing saved.
Many Americans take advantaged of employer offered and sponsored retirement plans.
There are numerous kinds of employer-sponsored retirement plans. For example, a 403 (b) is an employer contributable retirement plan for educators.
A Roth IRA is a retirement plan that is funded with net income, or income that has been already taxed.
Most people are familiar with the term 401(k), even if they don’t know what it is.
So, let’s talk about some of the most common retirement plan errors in reference to 401(k) plans.
Some basic 401(k) retirement plan errors include:
- Assuming employers file government required disclosure paperwork
- Not updating 401(k) plan information are laws are updated
- Withdrawing money early or frequently
First, let’s explain a 401(k) in basic detail.
What Is a 401(k) Retirement Plan?
A 401 (k) is an employer and employee contributable retirement plan. A portion of your annual salary is deducted and contributed to your 401(k) to fund your future retirement.
Many employers will financially match whatever the employee contributes to their 401(k)-retirement package.
Even if you don’t know what a 401(k) retirement is, you have no doubt heard the term countless times on TV.
A 401(k) is named after a tax law code.
There many kinds of 401(k) plans, but all are funded with gross, or, pre-taxable income.
(In comparison, a Roth IRA is funded with income that was already taxed).
What that basically means is that your 401(k) can be heavily via income tax laws after making withdrawals.
Non-Disclosure of 401(k) 5500 Series Form
The 5500 series form is a bureaucratic disclosure form that all businesses must file with the federal government annually.
Basically, your employer must provide the government with provable evidence that all 401(k) contributions and plan maintenance are being conducted professionally and in legally compliant manners.
The government must have evidence that 401(k) are being maintained in places of business with the utmost professionalism and in accordance with current I.R.S tax laws.
If your employer isn’t filing an annual 5500 series form, or is filing incorrect or outdated forms, then the integrity of your 401(k) plan could be at stake.
It’s one of those rather complicated retirement plan errors, but you should know about it.
When in doubt, ask your employer what you must know about 5500 series forms and your 401(k) plan.
Not Updating Your 401(k) to Reflect Updated I.R.S. Laws
Your 401(k)-retirement plan needs to be reviewed by yourself, your employer, or a financial advisor on an annual basis at least.
Most common retirement plan errors include just assuming that you can apply for one, like a 401(k), and then never think about it again.
I.R.S. tax laws and codes, especially those that deal with retirement plan contributions, are changed and/or updated on a regular basis.
You, or your financial advisor, must be continually apprised of such updates and changes.
For example, a recent legal update may increase or decrease the amount of matching contributions that your employer can contribute to your plan.
401(k) retirement plans differ from employer to employer, city to city, and state to state. No two are alike.
Don’t assume the details of your 401(k) will never need updating or review on a regular basis.
If you aren’t vigilant of such retirement plan errors, who will do such in your stead?
Early or Frequent 401(k) Retirement Plan Withdrawal
A retirement plan is basically a budget designed to pay for living expenses and last throughout the entirety of retirement.
When you have a 401(k), you must calculate how much money you must withdraw from it. And, only do such on an annual basis.
One of the biggest retirement plan errors is not understanding the penalties of early or frequent cash withdrawals.
By age 70 you must begin withdrawing money on an annual basis from your 401(k). This is called a required minimum distribution, or RMD. Otherwise, you will incur a penalty for not doing so.
Still, if you withdraw money from your 401(k) before you are age 59 and ½, then you will incur a costly 10% early distribution tax penalty.
Additionally, because a 401(k) is funded throughout working life with pre-tax income, each annual withdrawal is taxed according to the income tax code of your home state and city.
So, if you withdraw from your 401(k) more than once annually, even after age 60, you’ll pay income tax penalties for each withdrawal.
This is one of the easier retirement plan errors to avoid.
First, work on an annual retirement budget withdrawal plan. You should know how much money you need from your retirement plan on a weekly, monthly, and annual basis.
Make sure you understand all withdrawal and tax penalties for your 401(k) plan before you begin withdrawing money.
The monetary withdrawal rules differ for everyone. Don’t make assumptions.
Talk to your employer. Also, talk to a financial counselor or advisor if possible.
Never Assume
Inquire if your employer has a retirement fund plan. If you already have one, review it on an annual basis at your job and with a financial advisor if possible.
The costliest retirement plan errors are usually the most avoidable ones.
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.