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Don't let these tax errors derail your retirement income plan

There are many issues and factors that constitute successful estate planning. One of the biggest in terms of assets is what people have in their retirement plans, primarily IRA's and 401(k) plan. Several potential pitfalls exist in terms of how people withdraw money, transfer it or move it from place to place. If not done properly, it could cost people dearly in taxes.

One of the biggest points to remember about taking IRA distributions is that there are required minimum distributions required once a person is six months past his or her 70th birthday. The penalty for not taking enough out is substantial: a 50 percent penalty on the amount that is under-distributed.

Another mistake people often make occurs when money is inherited by a beneficiary. While the temptation may be great to take all the money in cash up front, it is often better to spread out the distributions over several years, both to ease the potential tax burden and to create a stream of income for the beneficiary.

While the allure of higher interest rates or a can't-miss investment opportunity might be tough to pass up, people have to be careful about how they transfer their assets. If they do it themselves, by taking a distribution from one plan and then rolling it back into another, they must complete it within 60 days of the distribution or risk 20 percent mandatory withholding.

Additionally, this maneuver can only be done once a year. However, having money sent via direct transfer, from one investment company to another, carries no withholding, no limits and is a much more hands-off procedure for a casual investor who is looking for a better return.

Source: MarketWatch, "Tax mistakes that can wreck your retirement," Andrea Coombes, Feb. 21, 2012

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