Column: Four retirement saving myths debunked

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Many people picture retirement as a pot of gold at the end of a rainbow: distant, magical, prosperous. But that image is often based on erroneous assumptions about saving for retirement.

Whether it’s how to save or how (or when) to withdraw that savings, a wide variety of scrambled ideas about nest eggs have come about over the years. Falling prey to any of them could leave your retirement plan cracked and broken. So let’s shatter four of these myths.

Myth: The safest place for most or all of your retirement dollars is in your employer’s stock. This way, you can help ensure its stability and contribute to its rising value.

Did we learn nothing from Enron? Many people continue to buy into the idea that if you’re a team player, you put your money where you work. Some think it’s just easier to go with the company they know best.

Yet, while there’s certainly nothing wrong with putting some of your hard-earned dollars in your employer’s stock, your nest egg will still be safer if you diversify its contents among a variety of investments.

And the higher your income level, the more danger you may be in. Key employees who receive some type of stock incentives often weigh down their portfolios with company stock, risking their retirement funds should their employers take an unexpected turn for the worse. Thus, to the extent reasonably possible, diversify your investments.

Myth: Your retirement is too important to jeopardize with risky investments. Stick to the most conservative instruments.

Although it’s certainly true that you shouldn’t take unreasonable risks with your retirement savings, investing too conservatively can lead to equally disastrous results. While your principal may be well protected if you put all of your dollars into money market funds and bonds, you likely won’t grow your assets enough to have the funds you’ll need at retirement.

That’s not to say these investments may not have a place in your portfolio. But, as is always the case with investing, balance is key. Slower growing investments can make a good foundation or, shall we say, “shell” for your nest egg, but more dynamic income-producing instruments can put more substance inside.

Myth: You can never put too much money into your tax-deferred retirement plan. Keep dumping in those dollars and you’ll be sitting on a gold mine come retirement.

Maxing out your 401(k) contributions is a time-honored bit of retirement planning advice with some merit. The problem that’s occurring for higher income earners is that they get a nasty tax surprise when they reach retirement.

Their liability is much higher than they anticipated. After all, retirement account distributions are taxed at your ordinary rate — which currently may be as high as 35 percent — not the 15 percent maximum rate that applies to most long-term capital gains and dividends.

Call it the “too much, too late” slip up. You contribute too much, and then you learn — too late — that Uncle Sam is going to be sending you a hefty bill.

To avoid this dire fate, some investors are trying a different route. They’re contributing amounts up to their employers’ matching limits and then turning to other vehicles with a lower tax bite. For instance, nondividend growth stocks or tax-efficient mutual funds may result in less tax liability.

Myth: You can roll over pretty much any retirement plan distribution into an IRA. And you should do so without hesitation to keep those dollars accruing on a tax-deferred basis or, if you have a Roth IRA, on a tax-free basis.

Many people opt to roll over retirement plan distributions into an IRA to enjoy the tax-deferred benefits mentioned. And it’s an excellent idea — as long as you follow the rules.

Not all rollovers are eligible. If you roll over an ineligible amount, it could trigger “the rollover rundown” — substantial IRS penalties and the costly requirement that you include the funds you rolled over in your annual income for the year the distribution in question occurred.

So what’s an ineligible rollover? For starters, required minimum distributions (RMDs) from qualified plans. These are the withdrawals you must start taking after you reach age 70 1/2. If you’re age 70 1/2 or older and rolling over into an IRA —tread carefully.

Ordering rules dictate that the first dollars withdrawn during the year are treated as your RMD. You may think that you are simply rolling them over into an IRA, but the rollover amount up to your RMD would be treated as ineligible — and be subject to a penalty up to the amount of your RMD. The portion of the rollover that exceeded your RMD would be eligible and, thus, not subject to penalty.

Other amounts the IRS may deem ineligible include loan distributions as a result of default or regulatory infractions, distributions to cover the cost of a life insurance policy, excess contributions withdrawn or returned from your qualified plan, and hardship withdrawals from your qualified plan or 403(b) plan.

These are but a few of the transactions that could trigger ineligible rollover penalties.

This has been a general discussion and is not intended as specific advice to anyone. Retirement planning theory is fairly simple: Save early, save as much as you can and save it in a place where it won’t disappear overnight. Of course, the details are where it gets complex. So always discuss your particular situation with your financial adviser.

Norm Grill ( is managing partner of Grill & Partners LLC (, certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 204-254-3880.


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