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Common Misunderstandings About IRAs

Retirement PlanningNo Comments

broken egg e1326911352154 Common Misunderstandings About IRAsEven the most savvy saver may fall victim to some of the common misconceptions about IRAs.  Arming yourself with the proper knowledge about how IRAs work will ensure you can protect and grow your retirement nest egg without incurring unnecessary taxes and expenses.

Here are some of the most common misunderstandings about IRAs and the straight scoop:

You need multiple IRA accounts.  Having multiple IRA accounts can merely complicate and confuse your financial picture.  You can contribute to the same IRA every year.

You can wait to fill out the beneficiary form.  The future of your retirement assets depend on how you fill out your beneficiary form, so don’t wait.  It’s simple and takes just a few minutes, yet its importance cannot be diminished as it governs how your IRA will eventually be taxed and passed on to heirs.

401(k)s are better than IRAs.  While the benefit of a workplace retirement plan can be great, the reality is that each employer treats their plans differently and your 401(k) plan may not offer as much flexibility as an IRA and may be more expensive in terms of administration fees.

You must take your required minimum distribution in cash.  If you own a traditional IRA, you will be required to take an annual minimum distribution when you reach the age of 70 1/2.  You can take it as cash, but you don’t have to – you can use in-kind security transfers, which don’t require you to incur a transaction cost or trade to rebalance your portfolio.

Rollovers are always best.  If you leave your employer, chances are you believe you should move your 401(k) into a rollover IRA.  This can be a good idea, but not always.  If a large portion of your 401(k) is in company stock that has appreciated, you lose the opportunity for a net unrealized appreciation tax break.

You can get a loan from your IRA.  Unlike 401(k)s, IRAs do not allow you to take out a loan against your account.  If you want to move money into another tax-advantaged account, you need to do a trustee-to-trustee transfer so you don’t incur a big tax bill.

Proper retirement planning can be a complicated process, but we can help.  Contact our Costa Mesa law firm for assistance.