Base your retirement plans on myths that make you afraid to save too much – and think you won't need that much money anyway? If so, you could be missing opportunities to set aside money early when you get the most benefit from compound interest and tax-free growth.
While tax-restricted savings plans present obstacles to withdrawing retirement funds, you can get the most money in an emergency. What's more, you have more opportunities for tax-deferred savings than you might think – and you'll probably need more money than you think. Take time to separate fact from fiction; It pays to understand the truth behind these five myths.
1. Your retirement contributions are locked in until you retire.
This is simply not the case, although you may have to pay taxes and/or penalties on withdrawals from your IRA. Employer contributions to retirement plans are harder to come by; however, you can borrow against your 401 (k) or defined benefit plan, although you will be expected to repay them before you leave the company. In some cases, you may even qualify for a hardship loan, but you should be prepared to pay taxes and penalties if you do so.
"You should view the 10% early retirement penalty as a positive reminder to you not to touch that money. Remember that it's likely that when you reach your sixtieth birthday, you'll still have at least a quarter century to live, "says Lex Zaharoff, CFA, senior wealth advisor, HTG Investment Advisors Inc., New Canaan, Connecticut.
If your retirement money is in a Roth IRA, however, your contributions can be withdrawn at any time. Time without taxes or penalties (see How to use your Roth IRA as an emergency fund ).
2. If you contribute to a retirement plan at work, you may also not contribute to a traditional IRA.
This myth is really a misunderstanding of the income limit rules that govern tax deductions for traditional IRA contributions. According to the IRS, if you have a 401(k) at work, your tax deductions for traditional IRA contributions may be limited (not prohibited) depending on your income. For example, if you were married in 2017 and filed your taxes jointly and your adjusted gross income (AGI) was 99.000 USD or less, you can request a full deduction (up to your contribution limit) of your IRA contributions.
3. You must roll over your retirement funds into an IRA when you leave a firm.
Contrary to popular belief, all retirement plans do not have to be rolled over into an IRA. In some situations, you can withdraw funds or transfer them to another account. For example, if you are 55 or older and leave a company to retire, you can withdraw money freely from the 401(k) retirement plan employer.However, if you have an IRA, no penalty-free withdrawals are available until you are 59½ years old. In any case, however, if you take this money and don't roll it over into an IRA or other business tax-deferred plan, you will have to pay income tax on it.
If you're under 55, you may also be able to transfer money from the previous company's 401 (k) to a new employer 401 (k) without penalty. Since this varies by plan, contact your plan administrator for details on a tax-free transfer. You can usually deposit your money into your former employer 401 (k) as well. The top reasons why you shouldn't roll your 401(k) over to an IRA explains the details.
It's also important to note that if you have company stock in your retirement plan, you can get preferential tax treatment by transferring the company stock to a brokerage account instead of transferring it to an IRA. Here's how it works: you withdraw the company shares from your account and transfer them to a taxable brokerage account to avoid income taxes on the unrealized appreciation of the shares (NUA).
4. You should never take the principal out of your retirement accounts.
"Don't touch your retirement savings" is good advice for employees who are saving carefully for the future. But, as mentioned above, you may violate this rule if you are in a serious money crunch. It is not a reason not to hide the maximum allowable money you can save. Once you retire, of course, you'll have achieved the lifestyle you've been saving for.
Financial advisors cite the well-known four percent rule that retirees should withdraw no more than about 4 percent of their retirement savings per year, based on a conservative portfolio, so their money will last about 30 years. While this theory has been challenged – some experts believe 3% is safer in today's economy – it doesn't mean retirees should only withdraw the interest or investment income their savings have earned. The key is to note your expenses and allow more room for medical (or other) emergencies over an extended lifetime.
"The best practice in retirement planning has evolved from" interest only "to" total return "investments. A diversified portfolio of equities, bonds and money market instruments provides both interest and the potential for longer-term growth from equity investments. When you spend the "interest" each year, deduct a certain percentage (often 4 or 5%). Sometimes this can exceed the annual returns, but over time the growth of the total portfolio should exceed the annual redemptions. "The portfolio can continue to increase in value and so can the annual withdrawals. This should protect your portfolio's purchasing power for decades and keep a better pace against monetary inflation," says Dan Danford, CFP®, Family Investment Center, Saint Joseph. , Mo.
5. You'll spend less money when you retire.
For many years, financial planners have advised clients to spend 85% of their annual earned income in each year of retirement.However, your actual retirement costs may be higher, depending on your health care costs, your hobbies, and how long you live.
The cost of health care for the average couple retiring at age 65 in 2017 is estimated at $404, 253, according to a report by HealthView Services. "People often don't have enough wiggle room for medical expenses. It doesn't always mean something final or terrible – take dental expenses! " says Marguerita Cheng, CFP®, RICP®, CEO of Blue Ocean Global Wealth, Gaithersburg, MD.
If you plan to travel in the early years of your retirement, your travel and travel expenses could be many times higher than you were during your working years. So don't be too optimistic when deciding how much you need in the bank before you stop working and sleep too late – or too optimistic about your taxes "I think the biggest myth I hear is that you're tax bracket, " says Allan Katz, owner and founder of Comprehensive Wealth Management Group, LLC, Staten Island, NY" Between pensions, Social Security, investment income and retirement income, that's not always the case. "
Bottom Line
Don't fall for annuity myths. Plan for your future by doing your own research using reputable government, educational and financial websites along with reliable print literature and financial advisors. Don't be afraid to save as much money as you can manage tax-free, knowing that your retirement funds aren't necessarily locked in until you retire.