Common Things to Avoid When Planning Your Retirement

Unfortunately, many people are in the following situation. They owe the government thousands of dollars in taxes and they find out when filling their tax return form, the reason? Well, many of the have been raiding their retirement plan. It is very painful, but on the bright side it is a lesson from which you can learn something. In order to avoid falling into this category, you must learn what's in this article.

This might sound incredibly obvious, yet many people are doing it. You need to make the commitment to NEVER under any circumstance take money out of your retirement plan. It doesn't matter if you are in financial troubles, withdrawing money from your pension will not only exhaust the funds you need to retire, but will also make you owe money to the government.

I'm not trying to scare you, well, perhaps I am, but this is how things work: When you withdraw money from your retirement plan the first thing you'll notice is that the government requires your administrator to withhold 20% of the money you retire for them. It is a huge percent but is not the end; things get worse.

There are more taxes and penalties to deal with when you retire this money. Apart from the 20% withhold you owe another 8% of that money to Uncle Sam if you are in the 28% tax bracket. The bad news doesn't end here, if you are less than 60 years of age you still have to pay more; you will be penalized with 10% and if you thought the tragedy is over, is not. Most states will charge you an additional 5 to 10% of that money.

It all means that from the money you retire, the government will keep from 35% to 48% of the money you retire, that's almost one half of the amount you retire which is supposed to be your money! money that you have been working for and that should belong to you in the first place, but unfortunately that's how things work. Check the following example: you retire $50,000 for an emergency or whatever. You will only see $40,000, and then you will realize in your next tax return that you owe $9,000 to the federal government and another $4,000 to the state.

The scenario above is scary but can be real. It was intended as a worst case scenario; sometimes you won't have to pay penalties or income tax in some cases, but you should always keep in mind that withdrawing money from your retirement plan is a bad idea, and if you really need to do it, consult with a tax advisor first.