Retirement planning is an essential part of a person’s professional life because let’s face it, nobody wants to be financially dependent at any point in their existence. Well, no self-respecting person at least. IRAs or Individual Retirement Arrangements are essential components of retirement planning wherein an individual can save a part of their assets towards future withdrawals.
There are various types of IRAs available provided by different organizations. There are also numerous regulations and governing conditions under which, such IRAs are managed. It is absolutely critical to understand all these regulations so that the IRA owner does not incur any losses for reasons that could have been avoided.
Inadequate knowledge about how the different IRAs are governed can take a person down a financial road they do not want to go since it will end up degrading their net value. Who wants this to happen? Only a financial masochist and there is not too many of those types of people around.
Such situations can easily be avoided by undertaking the proper measures and keeping abreast of all the latest developments and events. Here are 5 common IRA mistakes which, if avoided, can save you a significant amount of money and make you much more satisfied on your financial and life decisions.
- Not making tax deductible contributions towards the IRA
- A lot of people believe that it is a waste of money to make contributions to their IRA over the prescribed tax deductible limit. It is quite possible to make contributions to the IRA above the tax deductible limit, and the amount exceeding the tax limit will not be tax deductible. However, one should keep in mind that they will always be tax deferred, so your savings above the tax deductible limits will still grow as it should.
- Not considering a Spousal IRA for a non-working Spouse
- The general understanding is that the contributions towards an IRA can only be made through earned income. This is generally true for most IRAs; however, there is an exception to this rule. Under the spousal IRA, even the non-working spouse can make contributions towards the IRA under the same rule that exists for traditional IRAs.
- Not extracting the required minimum distributions at the correct time
- Failing to extract the required minimum distribution or RMD from your IRA account can have multiple implications and none of them are something to write home about. Excluding the Roth IRA, all the IRAs require you to start invoking an RMD after reaching the age of 70.5 years. After this age, if either the contributions are not high enough or you fail to extract the RMD, you will face penalties that will affect you in a negative manner. There may be up to a 50% excise tax imposed on the amount not distributed as and when required. As if you were not getting taxed enough. The federal government rakes in $400 billion a month, do not give them anymore!
- Establishing the IRA under a trust
- Making any trust the actual owner of the IRA can have a number of unforeseen implications that can and should be avoided. The fundamental disadvantage is that placing the IRA in a trust causes immediate taxation of the IRA. Moreover, if the IRA holder is below 59.5 years, there will be an immediate tax penalty of 10%, significantly reducing the monetary figure of your savings. Another big disadvantage induced by the trust is that the spouse loses the ability to rollover the IRA into his/her own without being heavily taxed in the process.
- Failing to name or update the name of your IRA’s beneficiary
- If the primary and contingent beneficiaries are not named or updated, it will cause the IRA’s assets to be distributed to the IRA owner’s estate. If that happens, the assets will immediately begin to be taxed and distributed quickly. There may also be unintended results and conflicts arising due to this confusion. For example, for your divorced ex-spouse to not inherit your IRA, his/her name should be specifically removed since this will not happen automatically.
These are some of the common mistakes which people make while planning their IRAs. These mistakes are not hard to manage and just take a little foresight to get right and some attention to detail. Shirking these financial responsilbities can be costly to your retirement plan. You do not want to see your savings eroded from your IRA for mistakes that could have been avoid.