If you don’t have good counsel when you’re starting out, it’s very easy to make one of several common and costly IRA mistakes. Your best defense: knowing what not to do when starting or maintaining your IRA.
Contributing too much or too little: If you put too much into your traditional IRA, it could lead to serious tax penalties; too much in a Roth IRA, and you can find yourself forced to take money out and pay penalties on that cash. If you don’t contribute enough, you find yourself scrambling at retirement time to cover your bills. Do not trust your accountants to avoid these common and costly IRA mistakes; make sure you know the rules yourself, and do the math periodically to be sure you’re covering yourself properly.
Being unaware of spouse rules: Among the most common and costly IRA mistakes is not realizing how to best set things up to benefit your spouse – or for both of you to benefit each other. A surprisingly large number of people don’t name anyone as beneficiary, or don’t realize spouses can make contributions equal to yours, or remember to periodically review their IRAs to ensure the proper person is named. At least once a year, go over your IRA with your spouse, and make sure you have everything set up properly.
Taking tax out at the wrong time: The traditional IRA allows you to put cash in pre-tax, but you are taxed at the other end when you take money out. A Roth IRA allows you to put money in post-tax, and you don’t get taxed when you withdraw. There can be a very substantial difference in how much money you make in the end, depending on how well your investments grow and what your relative tax brackets are at either end. A common and costly IRA mistake is assuming your tax bracket will be the same and using a traditional IRA; if your tax bracket upon retirement is higher, however, you will be losing money in not using a Roth.
Investing in the wrong things for your IRA type: Another of the most common and costly IRA mistakes, not knowing what you can legally invest in. Roth IRAs allow for the most flexibility, but even these IRAs have limitations, Know everything you CAN invest in for your IRA type, and then identify the things you SHOULD invest in for the best results.
Choosing the wrong IRA type to begin with: Roth and traditional IRAs have different eligibility factors, requirements, and benefits. In most cases, a Roth IRA is a better choice overall. However, if you make over a hundred thousand a year and already have a traditional IRA, you may not be able to tax it into a Roth. And not all employers provide the option of a Roth. Know how these IRAs both work before choosing one.
Knowing the age limits: Everyone knows you CAN start withdrawing money from your IRA at age 59.5. But not everyone realizes that you MUST start withdrawing by age 70.5 or face significant penalties – as much as 50% of the minimum amount you taxes supposed to be taking out. You can pull out the minimal amount if you’re trying to allow your IRA to roll over and become a nest egg for your heirs, but make sure you know what that minimal amount is.
Don’t make any of these common and costly IRA mistakes. Instead, get very competent counsel from the beginning to help you decide which type of IRA you want to carry, and to help you learn to administer it yourself if you choose not to avail yourself of their expertise. Remember, your IRA is a huge part of your future. Don’t give the tax man more of it than is taxes due.
William Brightworth is a consultant who writes about IRA investing in Real Estate Follow this link to learn more about IRA real estate investing
