Not contributing to your company’s retirement plan.
This is a no-brainer. You’re not only saving for the future, but you are reducing your federal and state tax burden. Often the company will match a portion of your contributions, too. You’ll be turning away free money by not contributing at least as much as your company will match.
Not contributing to a 529 college savings plan.
College costs are skyrocketing. The easiest way to save for future college expenses is to invest in a 529 plan. All of the growth is tax free when used for college expenses and some state plans will allow a deduction for your contributions. What if the beneficiary doesn’t go to college? It can be used for another family member of the beneficiary.
Not utilizing pretax company benefits such as child care.
If your company offers pre-tax child care benefits, use them! Even though you can get a child care credit on your tax return, it is limited. You can often save much more by using this benefit, especially if you’re in a higher tax bracket.
Taking Social Security too early.
Just because you can start receiving Social Security payments at age 62 doesn’t mean you should. By waiting until full retirement age (now 66 for those born between 1943 and 1954; 67 for those born in 1960 or later), you’ll get an additional 24%. That’s a 6% annual return on your investment! Advances in health care are allowing people to live much longer. Unless you’re in ill health or absolutely need the money to live on, wait until age 66 or even longer.
Not understanding mortgage closing costs.
We see a lot of ‘Final Settlement Statements’ from banks and mortgage companies and we are confident that many people could have saved a significant amount of money by shopping and comparing “Good Faith Estimates” from several mortgage companies.
Using your Roth IRA as a savings account.
Yes, you can take your investment back out of your Roth IRA account tax free, and you can even take the growth of the investment tax free after 5 years and after you’ve reached age 59-1/2. But you invested in the Roth to build tax-free savings for the future, so leave it alone.
Order of distributions/withdrawals in retirement.
Ok, the future is here. Now it’s time to start withdrawing the savings from your IRAs and Social Security. Which accounts do you draw from first? In general, you should withdraw your non-IRA accounts first, except for what you need for emergencies. Your taxes will be lower and your IRAs will continue to grow using their tax-sheltered status. Your Roth IRA should generally be withdrawn last since it will grow tax free and is not subject to Required Minimum Distributions (RMD).
Not talking to your accountant or financial advisor before you make important financial decisions.
Not talking to your accountant or financial advisor before you make important financial decisions. We see dozens of these cases every year where clients sell an investment property but don’t consult their advisor first. Often a little planning could have saved thousands of dollars in taxes. The same goes for distribution of estates and trusts, and general estate planning for wealthier clients.
Not investing excess cash in the market.
The fear of the next market correction, or crash, often makes investors anxious about putting money to work. That said, the biggest resource that we all have, as investors, is time. Time is the resource we can’t get back and is main ingredient for allowing compounding to build and grow wealth. It’s smart to invest if you have selected an appropriate asset allocation and properly diversified. If you’re not sure how to invest, use a professional.
Gifting assets to your children when you get old.
Normally when a person dies, their taxable assets such as stock or real estate, receive a step-up in basis, so the recipient of those assets can sell the property without paying income taxes. But, if the property is gifted, the basis retains the basis of the giftor, which may be very low. It can be a huge mistake to put your children on the title of your home, or gift anything taxable worth more than $14,000. Not only will you have to fill out a gift tax return, but the recipient will lose the benefit of the step-up in basis. Always consult with your financial planner, attorney or CPA before you gift or transfer any asset worth more than $14,000.