Retirement Account Red Flags: 5 Costly Mistakes to Avoid

From Fireproof Your Money · 14:42

Show by Wayne Firebaugh

The first two episodes in this series cost you money. This one can cost you a decade of it.Buried in the fine print of your IRA and 401(k) is a handful of rules that, stepped on the wrong way, can vaporize years — sometimes decades — of careful tax-deferred savings in a single afternoon. The cruel irony: the people who step on them are almost always the ones trying hardest to do the right thing.In part three of the How to Pay More Than Your Fair Share mini-series, fee-only fiduciary and CPA Wayne Firebaugh walks the minefield: five retirement-account rules that detonate quietly, expensively, and almost always at a moment of transition.The five land mines:1. The 401(k) loan that follows you out the door. Borrowing from your own 401(k) sounds harmless — even smart. You're paying yourself back, with interest. Here's what the brochure skips: if you leave that job for any reason with a loan still outstanding, the unpaid balance generally gets treated as a distribution. That balance becomes fully taxable income that year, and if you're under 59½ it gets hit with an additional 10% early distribution penalty right on top of the tax. Make it concrete: somebody with a $15,000 loan balance gets laid off in a rough quarter. In an instant that $15,000 becomes taxable income — in a middle bracket, plus the 10%, they could owe $4,000 to $5,000 in tax on money they borrowed from themselves and spent months ago. The layoff was the gut punch; the surprise tax bill arriving the following April is the land mine going off underneath them. And there's a quieter cost that bites even if you never leave: you repay that loan with after-tax dollars out of your paycheck, then pay income tax on that same money again decades later when you withdraw it. A piece of it gets taxed twice. The fix: treat a 401(k) loan as a genuine last resort, not a convenient ATM. And if you've already got one outstanding with a job change on the horizon, know this — the rules now generally give you until your tax filing deadline, not just 60 days, to repay or roll over that balance and dodge the whole mess. But you have to act inside that window.2. The missed required minimum distribution. The one that costs the most, lying in wait for anybody who inherits a retirement account. In your 70s the government requires you to start pulling money out of traditional retirement accounts every year. Skip one or take too little and the penalty is an excise tax of 25% of the amount you failed to withdraw — down from 50% until recently, and it drops to 10% if you catch it and fix it promptly. But you have to catch it. Inherited accounts are where this turns vicious. Most people who inherit a retirement account today have to empty the entire thing within 10 years — and here's the kicker folks never hear: if the person you inherited from had already started taking their own required minimum distributions, you may also be required to take a withdrawal every single year along the way, on top of emptying it by the end of year 10. Miss any of those and the same excise tax comes for you. Wayne has sat across from grieving heirs who discovered years later they'd been racking up penalties on distributions nobody had ever told them to take. The fix: the moment you inherit any retirement account, before you do one single thing, find out exactly what the distribution rules are for your specific situation — they genuinely differ depending on whether you're a spouse or a child, how old you are, and exactly when the original owner passed away. This is not a google-it-yourself rule. This is a sit-down-with-a-professional-in-the-first-week rule.3. The blown 60-day rollover. The one people step squarely on while trying to be responsible. When you move retirement money there are two roads. The right road is a direct trustee-to-trustee transfer: the money travels straight from one custodian to the other and never touches your hands. The dangerous road: they cut a check to you, and a 60-day clock starts ticking. You have exactly 60 days — calendar days, not business days — to get every dollar into another qualified retirement account. Miss that window by a single day and the entire amount becomes a taxable distribution, penalty and all. And there's a trap inside the trap. When a 401(k) pays money to you directly, they're legally required to withhold 20% for taxes right off the top. So you ask to move $100,000 and the check that lands in your mailbox is $80,000 — $20,000 went to withholding. To complete a full rollover and owe nothing, you have to come up with that missing $20,000 out of your own pocket and deposit the full $100,000 within 60 days. If you can't, the $20,000 the government is holding counts as a taxable distribution too. The fix is one sentence you memorize and carry for the rest of your life: always ask for a direct transfer, custodian to custodian. The boring road and the safe road are the same road.4. The backdoor Roth surprise. Aimed squarely at higher earners. If you…

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