Mistakes handling your IRA can be costly

Mistakes handling your IRA can be costly

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Certified Financial Planner John Fawaz appeared on Good Morning Tennessee Tuesday to warn of some of the common IRA mistakes investors make. Certified Financial Planner John Fawaz appeared on Good Morning Tennessee Tuesday to warn of some of the common IRA mistakes investors make.

KNOXVILLE (WATE) - If you make a mistake in handling your Individual Retirement Account, it may take years to earn back the lost interest.

Certified Financial Planner John Fawaz appeared on Good Morning Tennessee Tuesday to warn of some of the common IRA mistakes investors make.

Taking lump sum at inheritance - Taking an IRA inhertitance lump sum will result in losing 30-40 percent of the inheritance, depending on the size of IRA, because of taxes.

The solution is to use the "Stretch IRA" feature in the Internal Revenue Service code that allows non-spouse beneficiaries to stretch distribution over their life expectancy. The idea is to keep the funds as an inherited IRA and only withdraw the required minimum distribution. In the meantime you can let the rest of the assets continue to grow.

According to IRS Publication 590, the required distribution at age 30 is 1.9 percent. For a $100,000 IRA that amounts to a $1900 withdrawal. At age 40, the required distribution increases to 2.35 percent.

When you use the Stretch IRA plan the funds become like a pension and increase every year. You can even stretch the funds to your kids.

This is a very powerful planning tool that few people take advantage of.

Keeping company stock in 401K plan - Distributions from 401K are taxed as ordinary income, but if you roll your company stock to an IRA you can take advantage of "Net Unrealized Appreciation." That means if you withdraw from your IRA you only play ordinary taxes on the basis, but on gains you will be taxed at the capital gain rates.

The highest amount of capital gains is 20 percent, but the highest amount for ordinary income taxes is 39.6 percent.

Not updating beneficiary designation - Many people don't realize that no matter what your will says, IRA proceeds will go to whoever is listed on the IRA.

Not taking advantage of Roth 401Ks and IRAs - Most people elect traditional and regular 401ks to save taxes. The fact is, unless you are in a very high tax bracket, Roth IRAs and Roth 401ks are extremely advantageous.

For instance, a lot of people don't realize that regular IRA or 401k withdrawals at retirement are counted when figuring out whether your Social Security income will be taxed.

Income from Roth investments is tax free. People are living longer, so you are protected if taxes go up in the future.

Roth investments are much better for inheritance. Unlike regular IRAs, you don't have to wait to age 59 1/2 to withdraw.

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