Make wise choices with your IRA and avoid these 10 common mistakes
Waiting until the 11th hour to contribute to an IRA
You have until your tax-filing deadline (April of each year) to make an IRA contribution if you want it to count towards the prior year. Too often, investors wait until the last moment to make that contribution. What they could have done was to contribute for the new year at the beginning of that year. Last-minute contributions have less time to compound and grow and over time, that can lead to a serious shortfall of your money.
Assuming Roth IRA contributions are always the way to go
Investors have heard so many good things about a Roth IRA; tax-free compounding and withdrawals, no mandatory withdrawals in retirement. It is understandable to assume that funding a Roth instead of a traditional IRA is always the correct move. If you can deduct your traditional IRA from your taxes and your tax bracket is not terribly high, a traditional IRA may be the better choice.
Thinking IRA contributions are an Either/Or decision
Deciding whether to contribute to a Roth or traditional IRA depends upon your tax bracket. It is best to think about your tax bracket both today and in the future. Nobody has a crystal ball regarding future tax brackets therefore you have the ability to split your IRA contribution between a traditional IRA and a Roth IRA. You can do that as long as the total amount invested does not exceed the maximum for either type of IRA.
Not contributing to an IRA later in life
Many Americans are working longer than ever before. It is now allowable to contribute to an IRA no matter what your age as long as you have earned income. This is true for a traditional IRA as well as a Roth IRA. This is particularly attractive for you if you don’t plan on needing the money for yourself but plan on passing it on to heirs.
Triggering a tax bill on an IRA rollover
A rollover from a 401(k) plan to an IRA or from one IRA to another is not complicated if it is done correctly. The problem is that too many do it incorrectly and get taxed on the transaction. I have seen too many people having to pay taxes on poorly done rollovers. I strongly urge you to do your homework before rolling over a retirement plan to another type of retirement plan. Do it correctly and there will not be a problem.
Not being strategic about required minimum distributions from a traditional IRA
Required minimum distributions from traditional IRAs must begin at age 72 or 73 (depending upon your age). It might make sense to take your IRA required distributions prior to age 72 or 73 depending upon your tax bracket. This is a topic that you should talk to your accountant about.
Not reinvesting unneeded distributions from an IRA
Should you not need the required distribution from your IRA, you always have the option of putting that money back to work in a non-IRA type of account. You need not spend the IRA distribution if you do not need it.
Not taking advantage of Qualified Charitable Distributions (QCD) from your IRA
The law allows you (age 70.5 and above) to currently pass up to $105,000 from your IRA to a legitimate charity. The amount gifted to the charity will not count as taxable income to you and will reduce the size of your IRA for future mandatory distributions.
Not paying enough attention to IRA beneficiary designations
Beneficiary designations for IRAs supersede the beneficiary designations for a will or a trust. This fact is oftentimes misunderstood by many investors and even some estate planning attorneys. It is critical for you to review your beneficiary designation for your IRA.
Running afoul of the Roth IRA 5-year rule
The ability to take money from a Roth IRA tax-free is very attractive. However there are rules in place that you must adhere to in order to take advantage of this benefit. In order to take withdrawals from a Roth IRA income tax-free, the owner must be at least age 59.5 and the Roth IRA must have been established at least 5 years ago. A Roth IRA owner must satisfy the longer of these two conditions; age 59.5 and have established the Roth IRA at least 5 years ago.
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