and Maximize Your Retirement Savings
When it comes to planning for retirement, Individual Retirement Accounts (IRAs) are a popular and powerful tool. But even seasoned investors can make mistakes that limit the benefits of their IRAs. Whether you’re just starting out or approaching retirement, here are ten common IRA missteps—and how to steer clear of them.
1. Waiting Until the Last Minute to ContributeProcrastination can cost you. Many investors wait until just before the tax deadline (typically April 15) to contribute. While it still counts, those late contributions have less time to grow. Try to contribute earlier to give your money more time to compound.
2. Assuming Roth IRA Contributions Are Always BetterRoth IRAs are appealing, but they aren’t the best choice for everyone. If you're in a high tax bracket now and expect to be in a lower one in retirement, a traditional IRA might be more beneficial because of the immediate tax deduction.
3. Thinking It’s Either Roth or Traditional—Not BothYou don’t have to choose just one type of IRA. If you qualify, you can contribute to both a Roth and a traditional IRA in the same year—just stay within the annual contribution limits.
4. Not Understanding Income Limits for Roth IRAsHigh earners may not be eligible to contribute directly to a Roth IRA. But that doesn’t mean you’re out of options—backdoor Roth conversions may still be on the table, depending on your tax situation.
5. Assuming a Backdoor Roth IRA Is Always Off-LimitsHave a lot in traditional IRAs that haven’t been taxed? You may still be able to do a backdoor Roth, but watch out for the pro-rata rule. Consulting a tax advisor can help avoid unintended tax hits.
6. Not Contributing Later in LifeThink it’s too late to invest in an IRA? Think again. Roth IRAs don’t have required minimum distributions (RMDs), making them a valuable estate planning tool. Even if you’re retired, you might still benefit from making contributions.
7. Delaying Contributions Due to Short-Term Market ConditionsMarket volatility might make you hesitate, but don’t let short-term swings stop you from saving for the long term. Roth contributions can be withdrawn without taxes or penalties, so flexibility is built-in.
8. Misunderstanding the Five-Year RuleRoth IRAs have a five-year rule that determines whether earnings can be withdrawn tax-free. Each conversion or contribution has its own five-year clock, so be sure you understand how it applies to you.
9. Doubling Up on Tax Shelters in One YearBe careful if you’re maxing out multiple tax-sheltered accounts like an IRA and an HSA or 529 plan. The IRS has rules around how much can be contributed across various plans, and penalties can be steep for over-contributing.
10. Missing Required Minimum Distributions (RMDs)If you have a traditional IRA and are age 73 or older, RMDs are mandatory. Miss them and you’ll face a hefty penalty—up to 25% of the amount you should have withdrawn. Stay on top of deadlines and amounts.
Final Thoughts
IRAs are a fantastic way to build wealth for retirement, but avoiding these common mistakes can make a big difference in how much you save—and how much you keep. Consider speaking with a financial advisor or tax professional to ensure you’re making the most of your IRA strategy.
Need help navigating your retirement planning? We’re here to help!
When it comes to planning for retirement, Individual Retirement Accounts (IRAs) are a popular and powerful tool. But even seasoned investors can make mistakes that limit the benefits of their IRAs. Whether you’re just starting out or approaching retirement, here are ten common IRA missteps—and how to steer clear of them.
1. Waiting Until the Last Minute to ContributeProcrastination can cost you. Many investors wait until just before the tax deadline (typically April 15) to contribute. While it still counts, those late contributions have less time to grow. Try to contribute earlier to give your money more time to compound.
2. Assuming Roth IRA Contributions Are Always BetterRoth IRAs are appealing, but they aren’t the best choice for everyone. If you're in a high tax bracket now and expect to be in a lower one in retirement, a traditional IRA might be more beneficial because of the immediate tax deduction.
3. Thinking It’s Either Roth or Traditional—Not BothYou don’t have to choose just one type of IRA. If you qualify, you can contribute to both a Roth and a traditional IRA in the same year—just stay within the annual contribution limits.
4. Not Understanding Income Limits for Roth IRAsHigh earners may not be eligible to contribute directly to a Roth IRA. But that doesn’t mean you’re out of options—backdoor Roth conversions may still be on the table, depending on your tax situation.
5. Assuming a Backdoor Roth IRA Is Always Off-LimitsHave a lot in traditional IRAs that haven’t been taxed? You may still be able to do a backdoor Roth, but watch out for the pro-rata rule. Consulting a tax advisor can help avoid unintended tax hits.
6. Not Contributing Later in LifeThink it’s too late to invest in an IRA? Think again. Roth IRAs don’t have required minimum distributions (RMDs), making them a valuable estate planning tool. Even if you’re retired, you might still benefit from making contributions.
7. Delaying Contributions Due to Short-Term Market ConditionsMarket volatility might make you hesitate, but don’t let short-term swings stop you from saving for the long term. Roth contributions can be withdrawn without taxes or penalties, so flexibility is built-in.
8. Misunderstanding the Five-Year RuleRoth IRAs have a five-year rule that determines whether earnings can be withdrawn tax-free. Each conversion or contribution has its own five-year clock, so be sure you understand how it applies to you.
9. Doubling Up on Tax Shelters in One YearBe careful if you’re maxing out multiple tax-sheltered accounts like an IRA and an HSA or 529 plan. The IRS has rules around how much can be contributed across various plans, and penalties can be steep for over-contributing.
10. Missing Required Minimum Distributions (RMDs)If you have a traditional IRA and are age 73 or older, RMDs are mandatory. Miss them and you’ll face a hefty penalty—up to 25% of the amount you should have withdrawn. Stay on top of deadlines and amounts.
Final Thoughts
IRAs are a fantastic way to build wealth for retirement, but avoiding these common mistakes can make a big difference in how much you save—and how much you keep. Consider speaking with a financial advisor or tax professional to ensure you’re making the most of your IRA strategy.
Need help navigating your retirement planning? We’re here to help!
RSS Feed
