Top Misconceptions About Retirement Plans

There are several myths and misconceptions about retirement plans. How much do you know about taking out your money?

Get a pen and paper and take our Quiz. These are True and False questions. Test your knowledge.

1. You cannot take money out of your 401(K) plan until you retire. True False

2. If you take money out of your traditional IRA before you are 59 ½, you will always pay a penalty. True False

3. When you make withdrawals from your traditional IRA you must take cash. You cannot take shares of stock, corporate bonds or certificates of deposit. True False

4. It’s a good idea to name your “estate” as your beneficiary of your 401(K) or other retirement plan. True False

5. You cannot change the beneficiary of your IRA after you turn 70 ½. True False

6. Every year after you turn 70 ½ , you are required to take money out of your 401(K) . True False

7. If you are 70 ½, you are required to take money out of each IRA you own. True False

8. If your children are the beneficiaries of your 401(K) or other retirement plan, they can roll over the plan in to their own IRA when you die. True False

9. If your children are the beneficiaries of your IRA they must take all the money out of the IRA immediately after you die and pay taxes on it. True False

10. If you convert your traditional IRA to a ROTH IRA and then withdraw some or all of the converted amount in the next couple of years, those amounts could be subject to income tax.
True False

Ok, let’s find out how you did.

Answers:

1. FALSE: Generally, money that you take out of your 401(K) before you reach the age of 59 ½ is called early distribution. Early distribution of funds will usually mean you will have to pay a penalty plus income tax on those funds. There are exceptions to this rule. Some plans will allow you to withdrawal funds to pay for medical expenses, and some plans will even allow you to borrow money from your plan without penalty. Check your retirement plan to see which early distributions are allowed.

2. FALSE: As stated above, many plans will allow for early distribution to pay medical expenses, some will allow you to even borrow funds. There are many ways to get money out of your IRA without paying a penalty. You can also take money in installments over your life expectancy no matter how young you are. You can also take money out for certain college expenses or to help buy your first home. You must be careful however and not forget that although you can take the money out and not pay a penalty, you still must pay income tax on the money.

3. False: When you make a withdrawal you are permitted to take “property” such as stock shares or corporate bonds in stead of selling them first and taking cash. This allows you to continue to hold certain securities.

4. FALSE: Although there are a few advantages to naming your “estate” your beneficiary of your 401(K) or other retirement plan, overall it is not a good idea. By doing this you limit the options your heirs will have for taking money out after you die. A good example would be a spouse would not be able to roll over the plan into his/her own IRA because the beneficiary is listed as your “estate”.

5. FALSE: There is no time limit on changing your beneficiary . You may change it when ever and as often as you like.

6. True: You are required to take money out of your 401(K) plan if you are past the age of 70 ½ and actually retired. The key word is retired. If you are 70 ½ but still working then you are not required to withdrawal funds unless you are the owner of the business then it does not matter if you are working or not.

7. FALSE: There is a special rule that allows you to total the amount that you are required to take from each IRA that you own. You can then take the grand total from just one. If you prefer to take it from several you can do that as well.

8. FALSE: Your spouse is the only beneficiary who is allowed to roll over your retirement plan into his/her own IRA. No other beneficiary can do this, not even your children.

9. FALSE: When you complete your beneficiary form consult with a financial advisor. Careful planning by yourself and your children should allow that the distributions be spread out over your children’s life expectances.

10. FALSE: Converted ROTH IRA amounts are never subject to regular income tax after the year of conversion. You already paid the tax. However, the converted amounts might be subject to an early withdrawal penalty if you take the money out too soon after conversion and if you are younger than the age of 59 ½.

There are a lot of different retirement plans on the market today. Find one that meets your needs. Make sure you are aware of the penalties for early distribution and always consult with a financial professional before making any changes or withdrawals so you will know the outcome of your choices.