You're working hard to pump up your retirement nest egg, right? Well, then, the last thing you want to do -- after scrimping and saving and managing your investments to squeeze every last percentage point you can into your returns -- is to make one of these common mistakes that will cost you big money when you retire. Luckily, I've compiled three things to avoid. Here we go.

1. Don't blank on the beneficiary
Believe it or not, something as simple as naming a beneficiary on a proper beneficiary form could save untold thousands, perhaps millions. If the beneficiary is a spouse, he or she can merely take over the account. A non-spouse rolling the distribution into his or her IRA or pension will have to take required minimum distributions but will be able to "stretch" the distributions over his or her life expectancy, thus creating huge tax benefits.

With no living beneficiary, however, an IRA account goes through probate and must be emptied within five years. How bad can this hurt? Let's say your grandmother was an investing genius, buying bits and pieces of stocks she knew and loved during her life. She wanted to invest in the stores she frequented, the beer she drank, the motorcycles she rode, etc., much like these dividend-paying consumer brands:


Dividend Yield

10-Year Return

Lowe's (NYSE:LOW)



Nokia (NYSE:NOK)



Walgreen (NYSE:WAG)



Harley-Davidson (NYSE:HDI)



Southwest Airlines (NYSE:LUV)



Wendy's (NYSE:WEN)



Anheuser-Busch (NYSE:BUD)



S&P 500



Data provided by Capital IQ.

So through scrimping and saving and investing in the great businesses, your grandmother was able to leave $100,000 to your 12-month-old daughter.

If you had to empty the account and take the tax hit, you'd be left with something quite a bit less than 100 grand. But if you "stretch" the distributions, take out only the minimum required amounts each year, and earn 8% annual returns -- less than the historical norm of the stock market -- that $100,000 will turn into $3 million by the time your daughter is 67. That's the power of a tax-sheltered account.

This is extremely important, according to acclaimed IRA expert Ed Slott, author of Parlay Your IRA Into a Family Fortune. It's so important that the IRS rules might as well say: "Look, just name anybody -- any living, breathing person, with a pulse and a birthday -- at any time, and after you die, we will let that beneficiary 'stretch' or extend distributions over the rest of his or her life."

2. Review, review, review
Slott told Robert Brokamp, editor of the Motley Fool Rule Your Retirement newsletter service, the heartbreaking tale of a New York schoolteacher who'd accumulated a million dollars in her retirement account. But when she died, her husband found out he wasn't entitled to any of it. Turns out she started teaching before she met him, and she named as beneficiaries her mother, uncle, and sister. Both her mother and uncle had died, so the sister got everything -- and wouldn't share a penny of it with the husband.

"A simple event like that, imagine," Slott says. "She went to her death thinking that maybe her husband was taken care of, but it wasn't that way, and [then] he didn't get a cent." A simple review of her beneficiary form at any time during her decades of employment could have saved the heartbreak.

After this tale was published in Rule Your Retirement, a reader decided to check her husband's forms. "To my horror," she wrote, "I discovered that our mutual fund company had mixed up our paperwork somehow and listed our youngest daughter as the primary beneficiary!"

Your path to action is clear: Round up every beneficiary form for every IRA you have "at every bank, broker, or fund company," Slott says. "You will be amazed at what you will find, and it is good to know now while you are still breathing so you can change it."

3. Know your age limits
Let's close it out with an easy one. While most of us know you can start taking money out of your IRA at age 59 1/2, more people than you'd think don't know that you are required to start taking distributions at 70 1/2. If you don't, the penalties can be extremely costly.

Slott recounted the recent case of a 78-year-old who simply didn't know that. "That means he hasn't been taking distributions for eight years," Slott says. And the penalty? A full 50% of the amount he should have withdrawn but failed to.

Slott offers some more words of advice. "Make sure that if you have too many accounts or if it is out of hand," he says, "[you] start consolidating so you can figure out the right amount of your required distribution and you don't end up paying out all your retirement money in penalties."

Slott's advice doesn't end there. A free trial to Rule Your Retirement will give you access to Robert's entire interview with Slott. The trial also allows you to see every past issue, complete with specific stock and mutual fund recommendations, and Robert's eight steps to ruling your retirement. Here's more info.

This article was originally published Feb. 6, 2006. It has been updated.

Rex Moore owns no companies mentioned in this article. Anheuser-Busch is an Inside Value recommendation. The Fool has adisclosure policy.