Four out of every ten households have an IRA or individual retirement account, according to USA Today. It is easy to open an IRA, which is why they are so popular. However, figuring out the rules and regulations can be more complicated. You could easily make a mistake that could cost you thousands of dollars.
Here is a look at six of the most common, yet avoidable IRA mistakes.
#1: Not Putting Any Money In It
Probably the biggest mistake that you can make is not contributing to your IRA at all. If you don’t contribute or skip years, you won’t have anything at the end. Many people, especially younger workers, procrastinate when it comes to saving money for retirement.
There are severe consequences to procrastinating in this way. Each year that you are eligible to contribute and don’t, you are losing a chunk of retirement income. One of the most significant factors that determine how much money you have at retirement is how much you save. Your rate of return on investments doesn’t matter as much.
#2: Contributing Too Much
The Internal Revenue Service (IRS) has strict rules about how much money can be contributed each year. The limit for workers under 50 years of age is $5,500. After age 50, the amount increases to $6,500.
These limits are strictly enforced by the IRS. So, if you put in too much money, then you will be subjected to a penalty of six percent on the excess each year that you go over.
People usually go over the limit by accident. They might forget to change automatic investing for a deceased individual or fund an IRA after age 70 ½. It pays to continually monitor your contributions to make sure that you haven’t gone over the limit. If you catch the mistake, you can just withdraw the money before you file your taxes to avoid the penalty.
#3 Failing To Take The Required Minimum Distribution
Many people work past the age of 70, and forget to take the required distributions (RMDs) from their IRAs. While it seems like a minor error, it can cost you dearly.
You must take required minimum distributions on nearly every retirement account by age 70 ½. The only exception to this is the Roth IRA as they are not taxable anyway. The fine for not taking the entire distribution amount by the time you are 70 ½ is 50 percent of the distribution. This penalty is quite severe—and entirely avoidable.
#4 Not Making Contributions For Your Non-working Spouse
This mistake is one of the most common that people make when it comes to their IRAs.
Although a non-working spouse does not have any income, they can still make contributions to an individual retirement account and the rules are almost the same as for the working spouse. As long as the working spouse earns at least $11,000, and year and has enough income to cover the contributions to both retirement accounts, the non-working spouse can make the same contributions to the account.
#5 Not Naming a Contingent Beneficiary
It is essential to ensure that your beneficiary is accurate and up-to-date. Not only that, but make sure that you have named a contingent beneficiary as well.
If your primary beneficiary is deceased and you do not have a second beneficiary designated, the funds from your IRA will be distributed to your estate. They will then be subjected to creditors, and could lose critical income-tax advantages.
Review and update your beneficiaries after significant life events, such as marriages, divorces or when new kids or grandkids come along.
#6 Putting Your IRA In A Trust
Making a trust the beneficiary of your IRA can cause problems. You’ll incur a 10 percent penalty if you are under the age of 59 ½, and any money that is placed in a trust will have to be reduced by the tax liability when the IRA is distributed. Also, IRA assets will have to paid out within five years of the owner’s death.
Additionally, once the trust assumes ownership of the IRA, your spouse will lose the ability to roll the IRA into their retirement account without stiff tax penalties. Therefore, avoid putting your IRA in a trust.
Regards,
Ethan Warrick
Editor
Wealth Authority
