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Across My Desk: Points 5 through 10 of the Top 10 Wealth-Management Pitfalls



What follows are the rest of the 10 Wealth-Management Pitfalls that Morningstar's Sue Stevens, a CFA, CFP, CPA, wrote about earlier this year.

One piece appeared in Sue's Monthly Newsletter on August 30, 2007. Another version of it appeared Jan. 25, 2007:

6. Mismanaging Windfalls

Sometimes life hands you a little something extra. Maybe it's stock options or an inheritance or some other once-in-a-lifetime event. Now that you've got that money, what do you intend to do with it?

Many of you will benefit from professional advice in these types of situations. There are almost always tricky tax implications. For stock options, you have to understand what type of tax you may trigger upon exercise or sale of your shares: ordinary income tax, capital gains tax, alternative minimum tax, or all of the above. Careful planning can help you keep more of your windfall.

Over the next 10 years, $10 trillion will pass from generation to generation. Most heirs have no idea how to integrate that wealth into their own portfolios. For more on that topic, read "Six Steps for Investing an Inheritance."

7. Failing to Maximize Retirement Plan Benefits

Sadly, the majority of participants in company retirement plans don't put away anything close to the maximum contribution. For 2007, you can contribute $15,500 ($20,500 if you are over age 50 and your plan allows it) to 401(k) plans, 403(b) plans, and 457 plans. If you have a profit-sharing or SEP plan, you may be able to sock away as much as $44,000 a year.

If you are at the executive level of your business, in addition to the "qualified" types of plans discussed above, you may be able to take advantage of "nonqualified" plans. These plans allow you to put away money and defer paying tax on the income until a future date when you take withdrawals. These plans have fewer restrictions on how much and who can contribute than qualified plans do. The downside is that you cannot roll over these plans (in general) to an IRA. When you take distributions, they are immediately taxable. In addition, if your company goes bankrupt, your nonqualified assets are not protected. You'll stand in line with other creditors. Good planning can help you make the most of these opportunities.

Another potential retirement pitfall is making a mistake when rolling over your company retirement plan to a traditional IRA. It's important to understand the tax issues, cash flow considerations, and potential penalties. For more, read "Tips for Managing Rollover and Inherited IRAs." To better understand the "dos" and "don'ts" of pension planning, read "Set for Life Through Your Pension Plan?"

8. Drawing Down Assets in Retirement

One of the biggest fears retirees have right now is running out of money too soon. You need to spend time thinking carefully about what you'll have coming in during your retirement years as well as how much you expect to spend. You should probably seek professional help to quantify the probability of whether your assets will provide the type of retirement you've envisioned. For more ideas on drawing down assets in retirement, read "How to Tap Your Assets in Retirement."

Even with careful retirement planning, there's always going to be change. You'll need to revise your plan as time goes by. A healthy dose of common sense also goes a long way. In times when the economy is sluggish and the stock market is gloomy, you can at least control your own expenses. This can mean voluntarily tightening your belt by spending less as well as by choosing investments with low costs.

Once you reach age 70 1/2, you'll have to start taking withdrawals from traditional IRAs and most company plans. For more on how to calculate what to withdraw, read "How to Manage Retirement Portfolio Distributions." If you need a little help on structuring a portfolio in retirement, read "Model Portfolios for Retirees."

9. Failing to Plan Your Estate

The estate-planning arena is loaded with wealth-management pitfalls. Many of you may not have any plan in place at all. That's your biggest pitfall. The best way to care for your family if something happens to you is to put an estate plan in place. To find out more about what a surviving spouse will need to do, read "Prepare Your Spouse for Financial Independence" and "Financial Steps to Take When Someone Dies."

Other potential pitfalls include setting up a plan but forgetting to fund your trusts, and forgetting to change your beneficiary designations on life insurance, company benefits, IRAs, and other accounts. Another important part of your planning should include considerations for disability as well as death. Powers of attorney for health care and property can help if you are disabled. So can living trusts. For more on estate- and gift-tax issues, read "Top 10 Estate-Planning Mistakes."

10. Leaving Heirs Unprepared

One of the biggest concerns for families with significant wealth is how to teach their heirs how to responsibly manage the money they'll eventually inherit. You can set up children's trusts within your estate documents that stagger the ages for access to the money over time. For example, instead of giving the children all of their inheritance at age 25, when they may not be emotionally ready for it, you can give them part of it at age 25, another portion when they are 35, etc. If they "blow" the first installment, there is still a chance they can make the most of the remainder of the estate.

Having family meetings during your lifetime can also go a long way toward educating your loved ones on how to manage that wealth. It can also head off potential family squabbles over what your intentions are with respect to your


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