5 Biggest IRA Mistakes

For many individuals, IRAs are significant assets that need to be protected. Last year it was reported that the average balance per IRA owner was $127,600, and many have even more squirreled away. Unfortunately, many make mistakes that can cost them, and their families, dearly. Here are 5 mistakes to avoid.

1. Failing to maximize contributions

The earlier you start to save for retirement through an IRA, the more money you’ll have later on. Unfortunately, IRA savings may not be a priority for many individuals, especially those who have other financial concerns (e.g., saving for a home, paying for college, repaying college loans). However, it is a big mistake to overlook this tax-advantaged savings opportunity.

• If you are eligible to contribute to an IRA, aim for the maximum contribution limit, which is currently $5,500, or $6,500 for those 50 and older by the end of the year.
• If you have a nonworking spouse, contribute to his/her IRA.
• If you are an active participant in a qualified retirement plan and your income is too high to make a deductible IRA contribution, determine whether your income permits you to make a Roth IRA contribution.

2. Not naming a beneficiary

One of the benefits of IRAs is tax deferral, which allows income to build up without current taxation until required minimum annual distributions (RMDs) must begin. If you don’t name a beneficiary, the IRA passes through your estate. This means all of the funds must be distributed under the 5-year rule (i.e., in full by the end of the fifth year following the year of death) if you die before the required beginning date for RMDs (April 1 of the year after the year you reach age 70-1/2). If you die on or after the required beginning date, RMDs may be made over your remaining life expectancy.

Review your beneficiary designations to make sure you have named the individuals you want to inherit your account. Keep copies of these designations with your important papers.

3. Putting an IRA in trust

If you make an IRA an asset of a trust that you set up, your family could miss out on certain opportunities. For example, if you want your spouse to inherit your IRA, don’t do this through a trust; name your spouse as the beneficiary of the IRA. If the surviving spouse is the designated beneficiary, he/she can roll over the funds to his/her own account. If not, then the surviving spouse may be forced to receive distributions under the 5-year rule mentioned earlier.

4. Not monitoring investments

The nest egg you have through your IRA is only as large as the investment returns you reap on your contributions. It’s up to you to maximize your returns by:

• Checking on fees and charges. Amounts subtracted from your account to cover these costs diminishes your returns. Make sure you understand what it’s costing you to maintain your account and to make investment selections.
• Taking appropriate risk. The younger you are, the more risk you can afford to take with respect to your investment selections.
• Reviewing investment returns. What seemed like a good investment choice at one time may no longer be wise, given changes in the market, changes in your risk tolerance, or other factors.

5. Failing to take RMDs

While IRAs allow you to save for retirement, there’s a day of reckoning when you’re required to take distributions. If you fail to take required minimum distributions (RMDs), you face a 50% penalty. Recognize that RMDs:

• Are not required for an owner of a Roth IRA (i.e., no lifetime distributions required)
• Apply to heirs of IRAs and Roth IRAs
• Can be postponed on qualified retirement plans for those still working (if the plan allows) but not for IRAs

Conclusion

Don’t fall for any IRA mistakes that are all too common. Learn about your savings opportunities. Discuss your personal situation with your financial and tax advisor.