IRAs, or Individual Retirement Accounts, are great tools for retirement savings. The best tactic says Born2Invest in the article “Retirement planning: 8 common IRA mistakes” is to make the most of your IRA, as early in your career as possible. That will give you a larger nest egg later in life.
Avoid these classic errors and keep that IRA growing!
Not contributing. This is the biggest mistake of all. Most of your retirement income will come from money you saved while you were working, not the gains they earn. Missing a single year means missing out on the compounded growth that occurs over time. Save as much as you can.
Not contributing enough. Traditional IRAs and Roth IRAs let you contribute $5,500 every year. Once you turn 50, there’s a catch-up contribution so you can contribute up to $6,500. Saving the maximum amount, lets you enjoy the benefits from a tax and savings perspective.
Examining tax benefits. There are different rules for Roth IRAs, different rules for traditional IRAs and (you guessed it!) different rules for 401(k)s. Educate yourself about the different benefits that each offers. If you’re in a high tax bracket now and expect to be in a low tax bracket later in life, you might want to use a traditional IRA. However, for the opposite, a Roth might be your best bet.
Don’t forget the distributions. This is one of the costliest mistakes that people can make. Traditional IRAs have Required Minimum Distributions (RMDs) that require you to take out a certain amount, starting when you turn 70½. Did you miss the window? Tax penalties are steep: up to 50%. Roth IRAs don’t have RMDs, except when the account is inherited by a non-spouse beneficiary.
Pick the right retirement account for you. Far too many people just pick a traditional IRA without exploring other options. Maybe a SIMPLE or a SEP would be right for you. If you’re self-employed, there are several different retirement accounts and you may be able to put away more pre-tax dollars.
Don’t miss rollover deadlines. When you change jobs, you can roll over an old 401(k) to an IRA, with no tax penalty. However, those funds have to make it to the new account within 60 days. Best bet: do a direct rollover and remember you can only do this once every 365 days, for all your IRAs.
Invest wisely and effectively. IRAs give you some degree of choice over where you invest. Don’t just opt for the most conservative funds; diversify with a balance of higher risk and return vehicles and more stable, low-interest ones. Don’t put your money at risk but don’t let it stagnate either.
Forgetting to name beneficiaries. Just like other investment accounts, you’ll need to name a beneficiary for your retirement accounts. What your will and other estate documents say does not have any impact on the distribution of assets in your retirement accounts. You must name beneficiaries, and if possible, successor beneficiaries, so your assets go where you want them to. Repeat: the beneficiary designation supersedes your will, so chose your beneficiaries with care and review them every few years.
Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plan or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.
For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).
Reference: Born2Invest (Sep. 11, 2018) “Retirement planning: 8 common IRA mistakes”