Common IRA Mistakes in Retirement Planning
Updated on Nov 02 2018
Individual Retirement Accounts (IRAs) are a great investment tool for retirement as they offer tax advantages and catch-up contribution benefits. However, it’s important to be aware of common IRA mistakes in retirement planning that can be hindering the growth of your nest egg.
Like anything, education is important when it comes to managing your investments. It’s obvious that avoiding and not contributing enough to build your retirement savings will limit your retirement income; but not diligently managing the investments you have can also cost you.
Here are eight common IRA mistakes that might be hindering your retirement savings:
1. Not contributing
Compound interest is key when it comes to growing your investments. If you’re not investing or contributing to your IRA, you’re losing years of potential growth as most of your retirement income will come from money you’ve saved in the account, not the gains on those savings. In fact, even a single year can make a big difference, so if you meet the eligibility criteria, put in as much as you can.
2. Not contributing enough
While it may be tight, adding a few more dollars to your IRAs each month will pay-off in the long run. Traditional and Roth IRAs allow you to contribute $5,500 a year, or $6,500 after you turn 50. Contribution limits apply together to all IRAs you own, so you can’t contribute $5,500 to each. However, contributing the maximum possible lets you set up a tidy retirement nest egg and enjoy tax benefits from these savings, as well.
3. Maximizing tax benefits
Different tax rules apply to traditional and Roth IRAs, so make sure to choose whichever investment makes sense for your unique needs. The former is funded with pre-tax contributions and taxes apply to gains and withdrawals. This helps if you’re in a high tax bracket now and expect to be in a lower one after retirement. Keep in mind that with Roth IRAs, it’s the opposite. An expert financial advisor can help you navigate which investment might make the most sense for you.
4. Not taking distributions
When you turn 70.5, you need to be cognizant that traditional IRAs have required minimum distributions (RMDs) that start at this age. Not taking them, or taking less than the minimum, could leave you with severe tax penalties. Roth IRAs don’t have RMDs, unless the account is left to a non-spouse beneficiary after your death, so use them if you expect to receive social security benefits or other income after retirement.
5. Selecting the wrong IRA type
There are many IRA options, so it’s important to research which one makes the most sene for your financial situation. For example, most people open traditional IRAs without exploring other options, and SIMPLE or SEP-IRAs make more sense for self-employed individuals as there are savings opportunities. Roth IRAs offer tax-free growth and withdrawals after retirement, so they’re perfect for those who expect to be in a higher tax bracket when they retire or prefer not to take RMDs and let their money keep growing. Consult a financial advisor or fiduciary for help making sense of what IRA type is right for you.
6. Not meeting rollover deadlines
Many people don’t think about rollover deadlines when they change jobs, which can be costing them in tax dollars and penalties. It’s important to keep in mind that you can roll over your old 401k to an IRA without tax liabilities or early withdrawal penalties — if you deposit the funds within 60 days. Consider a direct rollover, if possible, and remember that you can also do this only once every 365 days — for all your IRA accounts together.
7. Not investing effectively
IRAs allow you the freedom to choose where your money is invested, and many people only invest in conservative options. It’s important to diversify your investments with a healthy balance of high-risk, high-return vehicles and more stable, low-interest ones to maximize your gains without putting your money at excessive risk. Just like in portfolio management, IRA accounts require a healthy mix.
8. Not adding beneficiaries
Many people think their living will and estate documents clarify who gets their IRA savings when you pass on, but it’s important to fill-out IRA beneficiary forms properly. Otherwise, your retirement savings could end up going to the wrong person, or make them liable for extra taxes. Consider professional assistance if you have any questions in this area.
Let Your IRAs Work for You
An IRA is an excellent way to set yourself up for the retirement of your dreams while reducing your taxable income. As with any investment and retirement savings, an expert financial advisor can help you determine what makes sense for your unique situation.
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