Debunking Common Retirement Plan Myths

At James H. Wilson Law Firm, we believe in empowering our clients with the facts they need to make informed decisions about their retirement plans. Let’s shed light on some common misconceptions you may have heard.

How Familiar Are You With the Ins and Outs of Retirement Distributions? Let’s Find Out

1. Early Withdrawals from 401(k) Plans: Contrary to popular belief, it’s possible to withdraw funds from your 401(k) before retirement age without a penalty in specific circumstances, such as facing medical expenses. Some 401(k) plans also offer loans against your balance. Be sure to review your plan’s details to understand your options, while also remembering that income taxes still apply to these distributions.
2. Avoiding Penalties on Traditional IRA Withdrawals Before Age 59 ½: It’s a little-known fact that there are several penalty-free ways to access your IRA funds early. Whether it’s structured installment payments, covering college costs, or assisting with a first-time home purchase, these exemptions exist. Remember, however, that these withdrawals remain subject to income tax obligations.
3. IRA Withdrawals in Kind: Many are surprised to find out that withdrawals from a traditional IRA don’t always have to be in cash. You can take out “in-kind” property such as stocks or bonds, allowing you to maintain your investments outside of your IRA.
4. Naming an Estate as a Retirement Plan Beneficiary: Designating your “estate” as a beneficiary for your retirement plans is generally discouraged due to limited benefits and numerous downsides. This choice may restrict the payout options available to your heirs, such as your spouse’s ability to execute an IRA rollover.
5. Changing IRA Beneficiaries After 70 ½: Flexibility is one of the benefits of IRAs, including the freedom to change beneficiaries at any age. This control remains with you entirely, even beyond age 70 ½.
6. Mandatory 401(k) Distributions After 70 ½: If you’re over the age of 70 ½ but still employed, you might not need to take a distribution from your 401(k) until you retire. This exception generally applies unless you own a significant share of the company.
7. Taking Required Minimum Distributions (RMDs) from Multiple IRAs: For those with several IRAs, the law allows you to calculate the total RMD due from all accounts and withdraw that combined amount from any one or a combination of your IRAs.
8. Non-Spouse Beneficiaries Rolling Over 401(k) Plans: Only spouses have the privilege to roll the deceased’s 401(k) into their own IRA. Unfortunately, this does not extend to children or other beneficiaries.
9. Immediate IRA Withdrawals Upon Death by Children Beneficiaries: With proper beneficiary designations and distribution planning, your children can potentially extend the tax-deferred status of inherited IRAs across their own lifetimes rather than facing immediate taxation upon your passing.
10. Roth IRA Distributions for Beneficiaries: Roth IRAs differ from other retirement accounts as you, the account owner, are not mandated to take distributions. However, non-spouse beneficiaries are required to take RMDs after the account holder’s death.
11. Roth IRA Conversions and Subsequent Withdrawals: Converted Roth IRA amounts are indeed shielded from income tax post-conversion. Yet, early withdrawal penalties could apply if funds are accessed too hastily subsequent to the conversion and you’re younger than 59 ½.
12. RMDs After Age 70 ½: Upon reaching 70 ½, there is a minimum distribution you’re required to take from your IRA. However, this is merely a base figure – you are certainly able to withdraw more as desired.

For professional guidance on navigating the complexities of retirement plans and distributions, contact the knowledgeable team at James H. Wilson Law Firm at 804.740.6464. Our attorneys are committed to helping you understand the intricacies of your retirement plan and ensuring your golden years are as prosperous as they should be.