5 Big Retirement Account Mistakes, According to Former Financial Advisor Humphrey Yang

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  • Humphrey Yang recently highlighted some major retirement account mistakes, including not actually investing your contributions.
  • Early withdrawal penalties and excessive investment fees are two common extra costs to watch out for.
  • You should also make sure not to invest too conservatively or skip funding a Roth IRA.

These mistakes will do a number on your retirement savings.

Many people use 401(k)s and individual retirement accounts (IRAs) to build their retirement savings. When used correctly, these can be a great way to invest for the future while saving on taxes. But there are some common mistakes that can cost you thousands, or even hundreds of thousands.

Humphrey Yang is a former financial advisor, so he has firsthand experience of where people go wrong. In a recent video, he shared five big retirement account mistakes to avoid.

1. Not actually investing

Some people don't realize that contributing to a retirement account is only the first step. For your money to grow, you also need to choose investments. Otherwise, you'll just have money sitting around, not growing at all.

Your investment options will depend on the retirement account you have. With a 401(k), the plan provider decides what your options are. These often include mutual funds and target-date funds. IRAs offer almost any type of investment, including individual stocks.

Yang recommends broad, diversified exchange-traded funds (ETFs) and index funds. Both are good choices that will get you a balanced portfolio with a large number of stocks.

2. Skipping the Roth IRA

Traditional 401(k)s and IRAs allow you to make tax-deductible contributions. You then pay taxes on withdrawals in retirement. Roth IRAs, on the other hand, don't let you deduct contributions on your taxes. However, withdrawals in retirement are tax-free.

Many financial advisors, Yang included, recommend contributing to a Roth IRA to have tax-free money in retirement. Suze Orman is another popular financial advisor who loves Roth IRAs.

IRAs and Roth IRAs each have their advantages, and the right choice depends on your situation. Some like to evenly split their traditional IRA and Roth IRA contributions. That's an easy solution if you're not sure which one is better for you.

3. Withdrawing money early

It's never recommended to look at your retirement savings as money you can tap into at any time. The rule with retirement accounts is that if you take out money before age 59 1/2, it's considered an early withdrawal. The early withdrawal penalty is 10%.

That means if you take out $100,000, there goes $10,000 right off the top. And if you're withdrawing from a 401(k) or IRA, you'll also need to pay income taxes on the withdrawal.

There are some exceptions, like withdrawing from an IRA to pay for college expenses or a first-time home purchase. But for the most part, it's best to look at retirement accounts as money you won't touch until you're at least 59 1/2.

4. Investing too conservatively

When you're young, you should have a growth-oriented portfolio. You can do that by either picking quality individual stocks or putting your money in stock-heavy investment funds. If stocks don't make up most or all of your portfolio, it will grow much more slowly, and you'll end up with far less money when you retire.

As you near retirement, you can shift to a more conservative asset allocation. Fixed-income assets, such as bonds, are a good way to reduce volatility in your portfolio. 

5. Paying too much in fees

Investment funds have fees, but it's important to choose funds that don't overdo it, because they can significantly reduce your returns. Yang says that fees of 0.5% to 1% are entirely too much.

He suggests investing in index funds that charge you less than 0.1%. This kind of savings makes a big difference in your returns, and that difference continues getting bigger as your portfolio grows. Fortunately, the top stock brokers normally provide a variety of low-cost investment funds.

Yang provides some great advice on mistakes to avoid with your retirement accounts and what to do instead. If you follow these tips, your retirement savings will grow more quickly and you won't incur any unnecessary extra costs, like hefty fees or early withdrawal penalties.

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