Most Workers Make a Costly 401(k) Error at Retirement
Eight in 10 workers commit a common 401(k) mistake at retirement that can trigger tax consequences and complicate required minimum distributions.
A significant majority of American workers — roughly 80% — make a critical error with their 401(k) accounts at the point of retirement, one that can set off a chain of tax-related complications in the years that follow, according to a report highlighted by MarketWatch.
The mistake centers on how retirees handle their retirement account balances as they transition out of the workforce. When balances are left unmanaged or improperly rolled over, the tax repercussions may not appear immediately but tend to surface later as account balances continue to grow.
Read more Roth Conversion Advice for Retirees in Their 80s: Does It Make Sense? →
One of the most significant downstream consequences involves required minimum distributions, or RMDs. Under federal tax law, account holders must begin withdrawing a minimum amount from traditional 401(k) and IRA accounts at a specified age. When balances accumulate unchecked, RMDs can balloon, pushing retirees into higher tax brackets and reducing the flexibility they have over their income in retirement.
Financial planners generally warn that decisions made at the moment of retirement — rather than years into it — often determine how efficiently a nest egg is drawn down. Failing to proactively structure withdrawals or consolidate accounts at retirement can lock savers into a less favorable tax position that becomes increasingly difficult to unwind as time passes.
The issue underscores a broader challenge facing American retirees: navigating the complexity of tax-advantaged accounts without professional guidance. Awareness of this common pitfall, and early corrective action, can meaningfully affect long-term retirement income. Continue reading at MarketWatch.com
