These simple mistakes can cause real problems
Your individual retirement account allows you to save money for your golden years without paying income taxes on it or the returns for your investments. The New York Times reports that over $5 plus trillion is currently saved in these accounts, with millions of it about to trickle back into the economy as baby boomers start withdrawing their money for retirement. If you are relying on an IRA to fund your needs after you leave work, you need to care for it properly during your working years. Check that you aren’t committing any of these six common mistakes as you manage your investment.
Watch Out For Contribution Limits
If you are very eager to boost your retirement savings, then you could accidentally contribute too much to your IRA. Each year the IRS releases rules on exactly how much you can put away before paying penalties. AOL’s Daily Finance says that if you discover you have contributed too much, simply remove the amount that goes over the limit before the final extended due date for income tax filings. For most people, this would be October 15th. Don’t forget to take any interest you’ve earned out as well. You will owe income tax on this money, but you would have paid this anyway if you had not invested it. The taxes are usually easier to afford than the high fees for leaving your contribution over the limit for the year.
Update Your Beneficiaries Regularly
Your family deserves to receive your hard earned savings if something unexpected happens to you before you get a chance of retirement. If you have not reviewed who is listed as your beneficiary in a few years, then talk to your investment adviser as soon as possible. Fox Business says that changes in your lifestyle or family should trigger reconsideration. You may decide that your brother or even a nephew should receive your savings if you are not married. Avoid naming anyone that is under the age of 18 right now. You may assume they will come of age before they have any reason to handle your IRA, but if life does not work out that way, then your beneficiary could be left with an account they cannot touch on their own.
Failing To Withdraw before age 70 1/2
The IRS will penalize you for taking out money before you reach the age of 59 ½, but also they impose fees if you do not start receiving your withdrawals by age 70 ½. Forgetting to remove your minimal distribution each year could end up costing you thousands of dollars in penalties. It’s easy to overlook this requirement, especially if you are still working into your 70s. Set up automatic transfers to your bank account every month to ensure you don’t miss the deadlines. If you are worried about tax issues, you may be able to transfer the balance as a gift or a charitable donation and avoid increasing the amount you owe the IRS every year.
Passing Up Education Opportunities
Many workers are struggling to find fulfilling careers because they don’t have the time or money to further their education. If you have a healthy IRA account, consider withdrawing a little cash to cover your college tuition or a training program. AOL’s Daily Finance says that this won’t trigger the usual income tax payment that other types of withdrawal require. You can improve your annual income over the rest of your life by using some of your savings for career advancement.
You can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. IRS website
Letting Someone Else Handle Your Savings
It is important to hire a trustworthy investment adviser when you are dealing with thousands of dollars in investments. However, this doesn’t mean that you can simply stop thinking about your IRA because you have someone helping you manage it. A simple mistake on your adviser’s part could leave you with no money left for retirement. Check your statements each month and bring up any discrepancies right away. Compare your returns against the national averages as well to determine if your portfolio is tailored to your needs.