Common IRA and 401(k) Mistakes to Avoid

Unless commitment is made, there are only promises and hopes – but no plans.

-Peter Drucker

Everyone dreams of retirement. Sitting on a beach, making up for missed time with family, or just getting well-deserved rest after decades of hard work – all and more make up most of our post-retirement dreams.

But, like business legend Peter Drucker says above, we’re building a future on promises and hopes unless we commit to that vision. To achieve those dreams and ideas, we need to develop a comprehensive retirement plan today and commit to it.

Everyone has their preferred retirement planning methods. If you ask me or anyone else on my team about any of our core retirement competencies – income and tax planning, investing, healthcare, and more – we could talk your ear off about different strategies and maximizing your opportunities today and after retiring.

But that’s not what we’re covering today. We realize that some prefer self-directing their retirement journey or aren’t yet ready to start working with us to help develop and realize a vision. Instead, we want to cover some guiding principles for managing an IRA or 401(k). We’ve seen these mistakes repeatedly during client onboarding, and if we can help you avoid any of them, you’ll be better positioned today for your retirement – no matter how far away that day may be.

Mistake 1: Missing Out On New Opportunities

The 2022 SECURE Act offers greater flexibility in managing your tax-advantaged retirement accounts. Here are a few key benefits investors often miss1:

• You can keep contributing to your retirement accounts as long as you're earning income. Previously, you had to stop new contributions when you turned 70 ½.
• Required minimum distributions, or withdrawals you must begin taking from your retirement account, aren’t in effect until you turn 73. That’s almost three more years to keep growing your retirement nest egg compared to past rules.
• You can withdraw up to $5,000 if you have or adopt a child, penalty-free.



These are just a few of the new unique benefits offered by the new SECURE Act. There are more for specific circumstances, so talk to a retirement planner to see what other opportunities are available in the new legislation.

Mistake 2: Don’t Miss Your RMDs

We mentioned RMDs in the previous section – if you miss a required minimum distribution, you must pay a 50% excise tax on the amount not withdrawn. So, if your RMD for a particular year is $10,000 and you miss that year’s withdrawal, you’ll pay the standard income tax on that distribution ($3,000) and 50% of the total RMD as an excise tax. 80%, or $8,000, of that year’s allocation goes right into the IRS’ pocket instead of funding your retirement when needed most.

This is one common mistake retirees make when managing their accounts, and extensive research shows that a range of RMD missteps leave account holders with less livable income during their golden years2 . At the same time, proactively projecting your RMDs is easy with enough planning for foresight, especially if you’re leveraging a wealth manager’s professional toolkit.

Mistake 3: Not Properly Designating Beneficiaries

Estate planning is complex because it’s difficult to objectively consider all the possibilities impacting your wealth after you pass (that’s why a comprehensive wealth management plan is critical). Still, one of the easiest parts of estate planning – designating beneficiaries – is also one of the most common mistakes we see.

A common mistake retirees make is not updating their beneficiary paperwork. Many assume other legal documents, like divorce decrees or marriage certificates, supersede older beneficiary designation documents. This isn’t the case. Even if your spouse waives their right to your retirement account, they’re still entitled to the balance if you pass unexpectedly – if you don’t update your beneficiaries.

Remember to deliberately designate your beneficiaries, too. Research shows that the average inheritance doesn’t last beyond a single generation3. An estate planner can help structure your beneficiaries by developing your designation document to avoid spendthrift problems, divorce, bankruptcy, disinheritance, and plain old bad choices.

We recommend getting a beneficiary checkup and following up on that annually – it’s a quick process when working with a professional planner that could save tons of time and trouble.

Mistake #4: Not Knowing that Rollover Rules Can Trigger Immediate Taxation

This mistake catches investors off-guard often and can devastate your retirement plan. Rollovers are common and often triggered by account consolidation or when you leave an employer.

When you execute an indirect IRA rollover, in which you get a check for your account balance, deposit it, and then write a check for that balance to your new account platform, you have 60 days to complete the transaction – and can only do one indirect rollover every 365 days4. That isn’t calendar year, either. It’s a rolling 365-day window, and any additional indirect IRA rollovers are 100% taxable and subject to an additional 20% tax withholding from the former custodian.

If you have multiple accounts spread across several custodians from past jobs, carefully planning consolidation is tricky and can trigger a huge tax burden. For this reason, direct rollovers are better. For direct rollovers, your existing custodian goes directly to the new custodian and cuts them a check – you’re no longer a middleman in the transaction. You can execute as many of these as you want annually.

Mistake #5: Risking Too Much

Risk is part of investing, but balancing portfolio risk and your retirement goals is difficult. It's especially tough when managing your portfolio because (like estate planning) it's difficult to be objective when it's your own money at stake.

At the same time, everyone's circumstances are different, which drives different risk tolerances. Because of these two factors, working with an established retirement planner is preferred. They'll help you remain objective and deliver the context you're missing based on their years of work with clients of all types.

Remember, bad wealth managers apply broad rules to all their clients, like allocating stocks and bonds based purely on age. Before working with a wealth manager, ensure they take the time to understand your unique situation and not simply use a cookie-cutter approach.

...to be continued...

1 https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf

2 https://web.archive.org/web/20230912212530/https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/retirement-portfolio-allocation/

3 https://www.kiplinger.com/article/saving/t021-c000-s002-5-strategies-keep-heirs-from-blowing-inheritance.html

4 https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions