Investing - Financial Mistakes to Avoid

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If you want to transfer assets on your death, do not transfer them before your death. Do not add your heirs as co-owners of your house or brokerage accounts. If you do, they may share your cost basis as well as the assets. Under current tax law, if they inherit, their cost basis in these assets generally steps up to the value of the assets at your death. This can be a huge difference in capital gains tax if/when they sell the assets.

To easily transfer assets to heirs on your death, look into "transfer on death" for house (not available in all states) and brokerages (available from most reputable brokerages and banks). Transfer on death is a direct transfer to your beneficiaries at your death, bypassing probate, wills, and trusts. It is easy to set up and easy to change. Since this covers only specific properties and assets, is does not eliminate the need for a will or trust.

When moving assets from a 401K or 403B to an IRA, be certain to follow the rules to avoid making this a taxable event. The easy and safe way to do this is to authorize your brokerage to request a direct trustee to trustee transfer from your employer plan to a rollover IRA.

Borrowing money from your 401K or 403B is risky. If you don't repay the loan on schedule, the balance becomes a (taxable) distribution. And if you leave your job (including layoff) the balance must be paid off by the next tax filing (sometimes sooner), generally April 15, or the balance becomes a distribution. If this happens, you will owe income tax on it and, if you are under age 59 1/2, a 10% penalty. Read the rules specific to your loan plan carefully.

Life insurance is important if you have dependents. But be careful of what you get. It is generally agreed that "whole life" insurance is a poor value due to high fees and low return on investment. "Term" insurance is preferred, in general.

Annuities have their place in a retirement plan, but you must be very careful in choosing a policy. Many have a high load (sales commission) and ongoing fees and you lose control over your money and access to it. If purchased inside an traditional IRA and the annuity payments have started, distributions are taxed as ordinary income and count as the RMD for the annuity portion of the IRA. If purchased in a taxable account, only the earnings part of the distribution is taxed (as ordinary income).

My suggestion, in preference to an annuity or an adviser run income portfolio, is an indexed dividend stock ETF, such as SCHD or VYM. These distribute mostly qualified dividends from established corporations that have a roughly 30% to 60% payout ratio. A portion of the corporate profits are given to stockholders as a qualified dividends and the rest goes to growth of the business or stock repurchase. This increases the dividends over time, likely surpassing inflation. And in a taxable account, qualified distributions get the capital gains tax rate, likely lower than the income tax rate. The fee for SCHD or VYM is .06%/year, much lower than an annuity or adviser.