Start early (or just start), stay consistent and never withdraw from your IRA, 401k or 403b. If you have to withdraw, there are certain things you can do to avoid penalties. Retirement is a tricky place today. My opinion is that we are going into somewhat of a crisis with the next wave of retirees since they weren't thinking about it that much. I gave a lecture around a year ago and the retirement discussion came to the table. I asked the people in the audience who owns a house? A number of hands went up. I then picked someone out of the audience. I asked when do you plan to retire? The person said around twenty years. I then asked how much are your current real estate taxes? The person responded $5,000. I then asked would it be reasonable to anticipate that your real estate taxes will be $10,000 when you plan to retire twenty years from now. The person said that it was a fair assumption. I went on and said well if you retire at 59 years of age and you live until your 69 did you know that it will cost you $100,000 (10 years x $10,000) just to pay your real estate taxes. The whole audience looked as if a bomb dropped.

I continued to go on to say that this is without food, clothing, utilities, automobiles, insurance, vacations, holidays, electric bills, gas bills, internet costs, cell phone bills, clothes, grandchildren costs and the list goes on. This definitely raised an eyebrow to most of the audience. It was to make them aware of the costs of retiring. The cost is astronomical. We are about to come up on a very large problem with the new class of upcoming retirees approaching age 59 1/2. Why? No one planned for it. No one planned to have a $150,000 mortgage when they went to retire, no one planned that there child was going to have $70,000 of school loans that they would have to help pay when they retired, no one planned that water, or television or cell phones or the internet would cost as much as they do.

Early withdrawal from your retirement account

Early withdrawal is a no no. There are ways that you can withdraw from them early if the correct circumstances are in place i.e. excess medical bills, home purchase etc. But you have to do this before the fact, not after. Unfortunately we see most people address the issue of early withdrawal of their retirement funds after the damage is done. Take a look. Let's say you withdraw $100,000.

Withdrawal                               $100,000

IRS penalty (10%)                          10,000

IRS Tax (estimate)                        23,000

Net amount back to you             $67,000

So the $100,000 you were taking out to pay the $90,000 bill.......it doesn't exist. In this scenario, you're getting on or around $67,000 depending on your tax situation. The unfortunate part is that a lot of people are in a position that they think they have to withdraw these funds. Withdrawing these funds can be avoided by being a little bit more conservative with your spending habits and spending less to avoid this.

So you're not getting $100,000. And remember this. You are being taxed on a lump sum. When you take these monies out gradually after you retire, the tax implications are much less if you withdraw them correctly.

Changing Jobs

Back in the day, on or around 10 years ago when you left your job, you could take your retirement monies with you. The rules were as follows. Take your money and you have 60 days to re-invest those monies into another retirement account. The problem, people weren't doing it, the IRS did not track it so people would take money out without any consequences, no taxes, no penalties.

Things have changed. The IRS has a microscope on these transfers, and rightfully so. So now your options are that you can take the monies out to yourself, BUT, taxes will be taken out, and the amounts will be reported to the IRS. These transaction has to be recorded on your personal 1040, this is where the IRS collects the 10% penalty, so there's no avoiding the transaction process.

Rollovers

Hence, 401k, IRA rollovers. When you leave or change a job, we highly recommend that you take your retirement monies with you, the sooner the better, or immediately. Reason is simple. You rather have the monies in your hands than a company that you worked for at one time. You don't always know your previous employees destiny or how their human resources will administer changes to their retirement benefits plan that may not be in your favor.

What the rollover does, is it takes monies from your previous employers retirement plan, establishes a retirement rollover account (which is your account under your name) and you now are in control of your retirement assets. The process is so simple it's scary. I have used a particular institution in the past and the process was very easy. They do the work, you give them your information. By choosing to go with a rollover you avoid taxes and penalties while preserving your retirement assets.

I look at retirement like the ocean, respect it and it will treat you well Wear a life preserver for safety measures. Same with your retirement account, pay yourself, and your finances some respect and you will do fine.

Robert G. Foranro is CEO of @ Accountant.com, he can be reached at bobf@ataccountant.com or by visiting the website at www.ataccountant.com