It is easy to make mistakes with IRA investments.
There are often tradeoffs when comparing costs versus benefits.
With IKEA furniture, you trade the time and frustration of assembly for the convenience of easily packing the entire piece of furniture into a vehicle.
Consequently, it is not uncommon for mistakes to be made along the way.
Specific parts may need to be disassembled and reassembled until the project is complete.
Been there and done that.
According to a recent Kiplinger article titled “Don’t Make These Common IRA Mistakes,“ mistakes are also common with IRA investments.
These mistakes can be quite costly.
Knowing the common issues and how to avoid them can help minimize financial costs.
What are some of the most common IRA mistakes?
Failing to Plan for the “Second Half.”
Many athletic events have two halves.
Those who start out well do not always finish well.
Instead, both halves are essential.
The same is true of retirement planning.
The first half of retirement planning involves saving and accumulating wealth to serve as income in retirement.
Even so, the saved money can quickly be depleted when not accounting for taxes.
By planning for taxes while saving, you can minimize future costs when you make withdrawals.
Converting to a Roth All at Once.
Many people find their tax rates are greater during retirement during the years they are saving.
In these instances, converting a traditional IRA to a Roth IRA is wise when the tax rate is lower.
Because you are paying the income tax on the converted money, the taxes owed on your subsequent tax return will be higher.
It is often best to complete rollovers over time rather than all at once.
Exceeding Roth IRA Income Limits.
Although traditional and Roth IRAs have contribution limits each year, only Roth IRAs have income limitations.
Singles can only contribute to a Roth IRA if their adjusted gross income is $144,000 or less.
Between $129,000 and $144,000, the contribution amounts are gradually reduced to zero.
For married couples filing jointly, this contribution titration begins at $204,000 and ends at $214,000.
As the contributor, you are responsible for keeping track of your Roth income limits.
Failing to do so and accidentally contributing to a Roth above your allowed amount?
Expect to be penalized at a rate of six percent for any excess contributions.
If you catch your mistake quickly, you can resolve the issue by recharacterizing the payment as a traditional IRA contribution or withdrawing the excess funds.
Doing Indirect Rollovers.
Transferring funds from one IRA to another must be done correctly.
If you withdraw the money via a check made to you, you have a limited 60 days to deposit the funds in another IRA account.
This is known as an indirect rollover.
Failing to do so within the allotted time will result in the withdrawn amount being treated as taxable income.
Indirect rollovers are only allowed once per year for IRA-to-IRA transfers.
Direct rollovers are better.
These occur when one IRA broker transfers the money directly from one IRA account to another without you touching the money in the transaction.
Accordingly, leave this to the pros.
Amateur hour can be expensive.
Forgetting about RMDs.
Once people reach a certain age, they must take the required minimum distributions from their retirement accounts.
Those who reach age 72 after December 31, 2022, can wait until age 73 to take these distributions.
All others must begin taking RMDs at age 72.
Common RMD mistakes include only making withdrawals from one account subject to the rules and underestimating the amount to be withdrawn.
RMD mistakes can be costly, too.
You can be charged a 25 percent penalty for failing to comply with the required minimum distribution rules for IRAs.
Some grace is extended to those who make a timely correction.
Rather than 25 percent, the penalty is reduced to 10 percent.
Review these common issues as you prepare for retirement using IRA accounts to avoid making costly mistakes.
As in all things financial, it pays to have a solid relationship with a financial advisor specializing in all retirement issues.
Reference: Kiplinger (July 25, 2022) “Don’t Make These Common IRA Mistakes“