KRT NEWS2USE STORY SLUGGED: NEWSUSE-MONEY1 KRT PHOTOGRAPHY BY KIRK LYTTLE/ST. PAUL PIONEER PRESS (May 26) In a survey of almost 1.5 million 401(k) plans, Hewitt Associates found that virtually 100 percent of the money transferred within the plans went toward one of three types of conservative vehicles: bonds, money markets and stable value funds. Although all are considered safe-haven investments when stocks are suffering, each carries different risks and rewards. (smd) 2003

Complex rules often haunt owners of Individual Retirement Accounts and not paying attention to the rules can result in a loss of retirement income.

By taking the time to manage IRAs, owners and beneficiaries will avoid mistakes and traps. Here are some of the more notable missteps, according to financial experts:

¢ Taking too much out. Retirees eager to start spending their savings may get too aggressive with withdrawals, said Tom Holmes of the Holmes Financial Group in Woodland Park, Colo., author of “Plan to Retire on Full Pay.” Five percent is about the most you should take out each year, he said.

“The biggest risk we are seeing today is people are running out of money in their retirement funds,” he said.

¢ Not taking the Required Minimum Distribution. The opposite of taking out too much is not taking enough. Once you reach age 70 1/2, if annual withdrawals, as defined by government tables, are not started, IRA owners are docked a 50 percent penalty on the amount that should have been taken out.

¢ Beneficiaries making withdrawals after the owner’s death. This mistake often is done by nonspouse beneficiaries, who then get taxed on the withdrawal, and if they are younger than 59 1/2, also pay an early withdrawal penalty of 10 percent. Holmes suggests that the beneficiary turn the account into a “stretch” IRA – retitling the account in his or her name. That way, the beneficiary avoids taxes and can use the IRA in retirement.

Beneficiaries may think withdrawing the money and transferring it to their own IRA will avoid taxes, Holmes said, but it won’t.

¢ Messing up rollovers. It may seem easy, but taking money out of one IRA and putting it into another is an accident waiting to happen. The best way is to have the new trustee of the rollover transfer it directly. Otherwise, once an IRA owner receives a distribution he or she is on the clock to set up the new rollover account and deposit the money within 60 days. Failure means a tax on the distribution and possibly an early withdrawal penalty.

Also, by not doing a direct rollover, 20 percent is withheld and the owner needs to make up for the withheld amount in the new rollover deposit or it’s taxed.

¢ Not keeping a copy of the beneficiary form. Both the owner and beneficiary should have a copy to speed transactions after the owner’s death.

“Often the beneficiary form is lost at the institutional level, as banks change,” Holmes said.

Ask the IRA custodian to send a copy of the form and make copies for each beneficiary. It’s free.

And don’t forget to also name a contingent beneficiary in case the main beneficiary is not alive at the time the IRA owner dies.

¢ Paying a penalty. Withdrawals from IRAs before age 59 1/2 come with a 10 percent penalty. Exceptions to the penalty include purchases for tuition, a first-time home purchase and health insurance when unemployed.

¢ Not contributing. Especially for young workers, an IRA not only can help save for retirement but also can reduce taxes today through the IRA deduction. Contributions of up to $4,000 a year are allowed for each person, subject to income restrictions.

Some of these rules do not apply to Roth IRAs.