Making IRA mistakes can be costly.
Saving for retirement seems as if it should be pretty straightforward.
Many people believe the only thing they need to do is set aside part of their paycheck every month into an IRA.
Although you cannot save for retirement without setting aside money, this is only part of successful retirement planning.
According to a recent Kiplinger article titled “Don’t Make These Common IRA Mistakes,” it is relatively common for people to make some blunders with retirement savings.
What are common mistakes?
Not Planning for the withdraws.
Retirement planning involves two distinct halves.
The first involves setting aside parts of paychecks while you work.
The second involves making withdrawals in retirement.
Although saving as much as possible is essential, you should also consider future taxes.
You should also have a plan to reduce retirement tax liability.
Converting to a Roth All at Once.
If you predict your tax rate will be higher during retirement than now, consider converting a traditional IRA to a Roth IRA this year.
Although you will owe taxes on the transferred funds now, you could lower your taxes in the future.
Because the transferred funds become reported as income for the current year, converting part of your IRA rather than the whole sum at once is often wise.
Exceeding Roth IRA Income Limits.
Both Roth IRAs and traditional IRAs have annual contribution limits.
With a Roth specifically, there is also an income limit.
In 2022, there is a gradual reduction in how much a person can contribute to a Roth based on their annual income.
Singles with an adjusted gross income between $129,000 and $144,000 may be unable to contribute to a Roth.
The adjusted gross income threshold for married couples filing jointly is $204,000 to $214,000.
Doing Indirect Rollovers.
Moving funds between accounts can be cumbersome for some.
If you choose to cut a check from one IRA to transfer to another IRA, this check must be deposited with the new IRA within 60 days.
If 60 days is exceeded, the funds become taxable income.
Only one indirect rollover is allowed per year.
Forgetting to Account for All RMDs.
With traditional IRAs, required minimum distributions will be mandatory beginning at age 72.
People often miss withdrawals completely or from some of their accounts.
This IRA mistake can be expensive as, typically, there are stiff penalties for not taking RMDs.
To best set yourself up for a less stressful retirement, take heed and avoid these common IRA mistakes.
Reference: Kiplinger (July 25, 2022) “Don’t Make These Common IRA Mistakes”