Individual Retirement Accounts, or IRAs, are particularly useful tools for retirement planning. It’s important to make the most of your IRA while you’re still young, so you have a larger nest egg to fall back on later in life.
Here are 8 common IRA mistakes that might be taking a toll on your retirement savings:
- Not Contributing to It:
This is by far the most serious mistake you can make, even if it’s only one year that you don’t contribute. Most of your retirement income will come from money you’ve saved in the account, not the gains on those savings. However, missing a single year means losing out on compound growth for years, so if you meet the eligibility criteria, put in as much as you can.
- Not Contributing Enough:
Traditional and Roth IRAs allow you to contribute $5,500 a year, or $6,500 after you turn 50. Contribution limits apply together to all IRAs you own, so you can’t contribute $5,500 to each. However, contributing the maximum possible lets you set up a tidy retirement nest egg and enjoy tax benefits from these savings too.
- Not Exploring Tax Benefits:
Different tax rules apply to traditional and Roth IRAs, so consider how these fit your unique needs. The former is funded with pre-tax contributions and taxes apply to gains and withdrawals. This helps if you’re in a high tax bracket now and expect to be in a lower one after retirement. With Roth IRAs, it’s the opposite.
- Not Taking Distributions:
Traditional IRAs have required minimum distributions (RMDs) that start at when you turn 70½. Not taking them, or taking less than the minimum, could leave you with tax penalties of up to 50%. Roth IRAs don’t have RMDs, unless the account is left to a non-spouse beneficiary after your death, so use them if you expect to receive social security benefits or other income after retirement.
- Selecting the Wrong IRA Type:
Most people open traditional IRAs without exploring other options, such as SIMPLE or SEP-IRAs for self-employed individuals. Roth IRAs offer tax-free growth and withdrawals after retirement, so they’re perfect for those who expect to be in a higher tax bracket when they retire or prefer not to take RMDs and let their money keep growing.
- Not Meeting Rollover Deadlines:
When you change jobs, you can rollover your old 401k to an IRA without tax liabilities or early withdrawal penalties. However, you need to deposit the funds within 60 days, which can be difficult. Opt for a direct rollover if possible, and remember that you can also do this only once every 365 days, for all your IRAs together.
- Not Investing Effectively:
IRAs allow you to choose where your money is invested, and too many people make the mistake of investing in conservative options alone. Diversify your investments with a healthy balance of high-risk, high-return vehicles and more stable, low-interest ones to maximize your gains without putting your money at excessive risk.
- Not Adding Beneficiaries:
It might seem like your will and estate documents clarify who gets your IRA savings when you pass on, but you should fill out beneficiary forms properly. Otherwise, your retirement savings could end up going to the wrong person, or make them liable for extra taxes. Get professional assistance if you’re not sure how to do this right.
IRAs could be the most powerful personal finance tool for your future income, so learn how to use them to the best advantage now for a happy, safe and comfortable retirement!