1) Collecting Social Security Benefits early
If you collect benefits before your normal retirement age of 66 and you continue to work, you probably will lose some benefits. If you earn more than $15,120 in 2013, you will forfeit $1 in benefits for every $2 you earn over the limit. This earnings cap goes away when you turn 66.
2) Not coordinating Social Security Benefits with your spouse
As a married couple, your main goal should be to maximize Social Security benefits for the surviving spouse. Statistics will show us that is usually the wife. That means the main breadwinner, usually the husband, should delay collecting Social Security retirement benefits until age 70 when they will be at their maximum and will pass to the surviving spouse.
3) Leaving Social Security Benefits on the table
Even if you decide to delay collecting retirement benefits until age 70, you should file for spousal benefits at age 66. That will boost your household income by 50% of the full retirement benefit the other spouse is already collecting. Meanwhile, your delayed retirement benefit is growing by 8% per year until you start collecting at age 70.
4) Receiving a check
If you transfer retirement accounts to an IRA, make sure you don’t get a check and the money is directly transferred to the new custodian. If you elect to get a check, your employer is required to withhold 20% for taxes and within 60 days you are required to roll the entire amount including the 20% you didn’t receive into an IRA. Unfortunately, any money not deposited will be treated as a taxable distribution and subject to tax and possibly early-withdrawal penalties.
5) Accessing Retirement accounts too early
If you withdraw your retirement funds before the age of 59 1/2 you will have to pay a 10% early-withdrawal penalty as well as the entire amount will be subject to Federal & State income taxes. An exception to this is if you leave your job, you can take distributions from your 401(k) without paying a penalty. If you transfer your 401(k) to an IRA you will lose this option.
6) Stopping early IRA distributions
There is a way to take distributions before age 59 1/2 from your IRA and avoid the penalty. It is called a 72(t) exception and you must take substantially equal periodic payments from your IRA based on your life expectancy for at least 5 years or 59 1/2 whichever is longer. Make sure you don’t deviate from the schedule or you will owe a 10% penalty retroactive back to the first withdrawal, plus interest.
7) Not planning for medical expenses
If you retire before age 65 and eligible for Medicare, finding health insurance might be difficult and very expensive. You can extend your employer benefits under COBRA for up to 18 months, but you will have to pay 100% of the premum and that can be very expensive. You might be better off financially finding an individual policy with a high deductible.
8) Failing to enroll for Medicare Part B on time
Once you turn age 65 you have 3 months to enroll in Medicare Part B which covers doctors visits and outpatient services or incur a late-enrollment penalty that will increase your premium by 10% for every year you delay. This penalty is waived if you or your spouse is covered by an employer plan.
9) Ignoring Required Minimum Distributions
Once you hit the age of 70 1/2 , you are required by April of the following to start taking withdrawals by December 31 of that year and they must continue every year thereafter. If you miss the deadline the penalties are very extreme-50% of the amount you were required to take. You can skip this distribution from your 401(k) if you are still working, but this does NOT apply to your IRA.
“Wealth, properly employed, is a blessing; and a man may lawfully endeavor to increase it by honest means.” ~ Muhammad