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Common IRA & 401k Mistakes: Part 2

Common IRA & 401k Mistakes: Part 2

October 16, 2023

Common IRA and 401(k) Mistakes to Avoid (Part II)

Our last article looked at some of the biggest mistakes future retirees make when planning their investment goals. We looked at:

  1. How the 2022 SECURE Act impacts your retirement accounts.
  2. How RMDs affect your retirement cash flow planning, and how missing an RMD can cost you.
  3. How improperly managing beneficiaries impacts your estate planning goals.
  4. Managing rollover taxation.
  5. How risk tolerance drives asset allocation.

In this article, we’ll cover more of the most (unfortunately) common mistakes we see investors making while planning their retirement and financial future – and how to avoid them.

Mistake 6: Paying Hidden Fees

The simplest way to explain hidden fees' impact on your retirement goals is through a simple exercise. After all, the difference between 1% and 2% fees seems negligible but adds up massively throughout a retirement account's lifecycle. Let's assume:

  • You're 30 and worked in a high-paying tech job for the past five years.
  • You’re ready to strike out on your own.
  • Your 401(k) is worth $50,000, and you’re rolling over the balance into a SEP-IRA.
  • You’ll fund your SEP-IRA with business proceeds from your new endeavor, but your primary goal is business growth – so you’ll contribute “just” $1,000 monthly to the account.
  • You’re weighing three options:
    • A self-directed account
    • A local wealth manager and retirement planner charging 1% of your total assets under management (AUM)
    • A brand-name global asset management firm charging 2% AUM

After 35 years, contributing $1,000 monthly and assuming 7% annualized returns*, you’re sitting at:


Assuming you’re investing in low-fee mutual funds with an expense ratio in the 0.2% range, your SEP-IRA is worth $2.1 million.

Local Wealth Manager and Retirement Planner

Working with the local wealth manager providing personalized service and upfront fee disclosures nets you $1.8 million.

The “Globo-Planner”

If you entrust your retirement to a big-name, impersonalized asset manager eating 2% annually, you're at $1.4.

Want to run the numbers? Here is one free calculator to see for yourself, or to compare other scenario variables like starting amount, monthly contribution, and return rates.

The difference between the high-fee, faceless corporate asset manager and self-directed retirement investing is nearly three-quarters of a million dollars. That cash is critical to retirement, especially once you factor in inflation 35 year's worth of inflation.

And, of course, the difference between self-directed retirement planning and working with a local wealth manager – about $360,000 – isn't nothing. However, many average retirement planners see that comparatively slim fee as a small price for not stressing over managing their account and its day-to-day fluctuations.

In addition, smaller wealth managers usually go above and beyond to earn their fees, offering a suite of retirement planning services or advisory offers that span income planning, healthcare education, and tax management. Research shows that more active retail investors lose money over their investment lifecycle compared to market indices, so make sure you execute due diligence to determine whether you have the inclination and time to manage your retirement account or whether forking a small fee is worth it1.

In either case, dig deep into the agreements and disclosures before deciding on third-party retirement help. Hidden fees are common and can cut deeply into your retirement bottom line. One research study indicates the average retirement account management fee is in the 2.5% range, so, if you can find assistance below that target, you're doing better than average!

*These are hypothetical examples for illustrative purposes only. These values are based on a 7% year over year annualized return which is not based on past performance, or future results of any investment vehicle.

Mistake 7: Not Turning Your Retirement Account into Tax-Free Income

This is less a mistake and more of a “hidden secret” most retirement investors don't know. But, like the other mistakes on our list, it could end up costing you in retirement. Remember that tax-deferred retirement accounts like a Traditional IRA come with a caveat. They're essentially bundled with an IOU to the IRS, where you promise to pay Uncle Sam income tax on your withdrawals, whether you begin as soon as you're eligible or wait until you take RMDs.

Government debt is ballooning yearly, and Uncle Sam will do everything possible to use your retirement income to pay that national debt load down. The good news for most retirees is that (speaking generally) you'll be in a lower tax bracket come retirement than you were during your working life. That's the core value proposition of a tax-deferred retirement account. So, even if you pay taxes, your burden will be lower today when you're actively contributing to the account.

But you can get away with paying even less if you know this information. You can convert your tax-deferred account to a Roth IRA, which has a key benefit* over a traditional account:

As the primary account holder, you aren't forced to take RMDs on a Roth IRA, so your asset value can continue growing until you need to withdraw a portion – and you dictate how much you take out, not the government.

You will have to pay income tax on a portion of the account when you convert, but here’s the hidden secret not many know: you can stagger your conversion across 5, 10, 15 years, or more – meaning you're taking control of your tax and can accurately predict just how much you'll owe during conversion. A competent wealth manager or retirement advisor can help manage that conversion process to maximize your asset transfer while minimizing your tax burden.

The bottom line is that when you leverage this newfound knowledge, dealing with a small tax hit today means you'll save a fortune in taxes tomorrow.

* Roth IRAs have income ceilings. If your earnings are high, you might not qualify. The cap on yearly IRA contributions is substantially lower than the cap on yearly 401(k) contributions. You can withdraw your contributions tax- and penalty-free. But early withdrawals of earnings could trigger taxes or penalties if you’re younger than 59½ or the account is less than five years old. Unlike traditional IRA contributions, Roth IRA contributions aren’t tax-deductible. *

Mistake 8: Keeping Your Cash in a 401(k)

Americans increasingly job-hop in today's economy. Before, staying with one company for the duration of your working life wasn't uncommon. Today, Americans (on average) hold 12 jobs throughout their lifetime2! If each job offers a 401(k) or similar employer-sponsored retirement plan, you can easily have a dozen different accounts spread across as many management companies. One in five Americans has a legacy 401(k) they don't access regularly, according to a financial services survey – they may not even remember they have the account in the first place3.

Of course, maximizing your 401(k) or other sponsored plan while employed is nearly always a good idea, particularly if the company offers a free match incentive. If you don't capitalize on the matching, at least, you're leaving literal cash on the table. But that free money ends when you leave the employer, and the more accounts you have floating in the ether, the more likely you are to forget one exists.

That's why rolling legacy plans into an IRA can make sense for some future retirees, but there are other benefits beyond the ease of access you get by consolidating. 401(k)s have critical limitations, potentially making keeping capital in a legacy account a losing proposition. For example, many plan guidelines dictate or restrict your access to the account. Employer-sponsored plans are also often frustratingly difficult to manage during estate planning, as plans typically have limited distribution flexibility for extended family members like grandchildren.

Furthermore, 401(k) and similar plans usually have limited investment options. They're usually restricted to "big name" mutual funds, many of which come bundled with hidden fees and artificially cap your diversification and risk management planning.

Finally, the biggest downside is that you can't directly convert a 401(k) to a Roth IRA within its existing plan structure. And, since these 401(k) plans usually come bundled with fees close to the national average (2.2% or more4), you could lose real purchasing power if you maintain a legacy account sans-matching. If you migrate legacy accounts to a self-managed Traditional IRA, you could save in fees – even if you find a local wealth manager charging 1%, you've cut your fees in half. There could also be an option to roll over right into a Roth IRA if you meet requirements.

Mistake 9: Having Too Many Accounts

This closely aligns with our previous point but bears repeating. We recently onboarded a new client with seventeen accounts, including a Thrift Savings Plan from military service, multiple 401(k)s from traditional employment, and self-directed plans alongside a SEP-IRA. Seventeen is a lot, but (like we mentioned above) having new clients come in with double-digit accounts isn't uncommon.

Now, this isn’t to say that too much retirement money is a problem – on the contrary. But avoiding any of the mistakes we've covered here is hard enough, and juggling 10+ accounts compounds the complexity. Retirement planning is already stressful, so don’t make things harder for yourself by leaving legacy accounts drifting in the wind.

Mistake 10: Not Getting a Second Opinion

Picture this – you go to the doctor for a minor cold, only to be told, "I'll pencil you in for heart surgery next week. Just stop by the nurse's station to confirm the appointment time." You wouldn’t undergo a costly and dangerous procedure like that on no-notice without a second opinion, right?

Retirement planning is no different.

Too many wealth managers bundle hidden fees or want to use your retirement portfolio as a testing ground for the next big thing. Even if you love the first one you speak with, getting a second opinion never hurts. It's free, and getting a second (or third, or fourth) opinion gives you a range of perspectives on wealth management and retirement planning that can help cover gaps in your knowledge.

What Now?

Hopefully, you've learned a few common mistakes to avoid. If everything we covered was old hat, then congratulations. You're better prepared than 99% of Americans with limited idea of effectively planning and managing their retirement prospects.

So, what’s next?

When we run discovery calls with prospective new clients, we like to use a “Predictable Retirement Outline.” Since you now know what not to do, our Predictable Retirement Outline helps show you where you stand and what you should do based on your unique life circumstances.

During follow-on visits, we look into the big-picture topics in our Predictable Retirement Outline, including investment planning, retirement income forecasting, healthcare considerations, and more. We also help determine your individual risk tolerance, something many investors need help pinning down on their own.

If you’re comfortable knowing what not to do with your retirement planning, now is the time to find out what you should do – give us a call or send an email to schedule your free 15-minute discovery call and get the ball rolling on your financial future.




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