Nine Most Common IRA Mistakes (the Dolans)

Are You Making These IRA Mistakes?
by Ken Dolan September 2, 2009 10:26 AM
Posted in: Invest Wisely IRA Retirement Center

For millions of Americans, an Individual Retirement Account is a critical piece of their retirement plan. If you are eligible for an IRA, you should be contributing to it each and every year, period.

But if you want to make the very most of your IRA, you must avoid the mistakes that cost many people dearly.

Let's take a look at the nine most common.



IRA Mistake #1:
Not Contributing Because of Stock Market Volatility
We heard from LOTS ofpeople over the last few years who stopped contributing to their IRA because of market volatility. DON'T you be one of them!

No matter what the market does, you should take advantage of the important benefits your IRA offers. First, you still get an important tax break on the dollars you are contributing. Plus, if you work for a company that offers matching IRA contributions, you are actually making money. Why on earth would you give up FREE money from your boss??

IRA Mistake #2:
Not Knowing the Contribution Limit
Sometimes the most common mistakes are also the easiest to correct. Not knowing your contribution limit is a common mistake that can cost you thousands.

On one hand, if you don't contribute the maximum allowable amount into your IRA, you are missing out on some good tax deductions and tax-deferred earnings. On the other, if you over-contribute, you will have to pay a stiff penalty.

For 2011, the IRA contributions limits are as follows:

If you are under the age of 50 by the end of 2011, you can contribute $5,000.? That amount can be split between a Roth and traditional IRA if you'd like.

If you are over the age of 50 by the end of 2011, you can contribute $6,000.


IRA Mistake #3:
Not Naming a Beneficiary
When you set up an IRA, you are not required to name a beneficiary. Name one anyway!

If there is no beneficiary on your IRA, the money in the account will typically have to go through probate, which can be an expensive and lengthy process. Also, the funds will be paid out over the remaining life expectancy of the deceased (or over five years), which will likely be shorter than a named beneficiary's life expectancy. This means the money is disbursed more quickly, putting a heavier tax burden on whoever receives the money.

Avoid this major IRA mistake and name a beneficiary so you can be certain where your IRA will go, and how quickly it will be distributed upon your death.

IRA Mistake #4:
Not Contributing to a Spousal IRA
A spousal IRA is an important retirement planning tool WAY too many people overlook. If you or your spouse does not work, or works part-time and has no company benefits, you can open a spousal IRA in addition to a regular IRA. You can double your overall IRA contribution by using a spousal IRA in addition to the standard IRA.

IRA Mistake #5:
Not Starting Your Withdrawals on Time
Traditional, SEP and SIMPLE IRAs all require you to take withdrawals annually after you turn 70-?. (Special note: If you have a Roth IRA, there is no mandatory withdrawal age.)

If you don't take a mandatory withdrawal on time, you'll pay dearly for this mistake. You will be required to pay a 50% penalty on the required withdrawal amount. Ouch! What a waste for an easy-to-avoid mistake! Make your withdrawal at the right time and keep your hard-earned money to yourself.

Remember: Your first withdrawal is due by April 1 the year after your turn 70 1/2, and you'll have to take another one by December 31 of that same year.




IRA Mistake #6:
Not Withdrawing Enough
So now you know that traditional, SEP and SIMPLE IRAs require you to take annual withdrawals after you turn 70 1/2. But you can't just take out five bucks and wait till next year! The amount you must withdraw each year is dictated by formulas based on your life expectancy, your current age and the amount of money in your IRA account.

Check with your financial advisor or use the tables found in Appendix C of IRS Publication 590 to determine your minimum withdrawals. Make a mistake and you'll face a stiff 50% penalty on the difference between what you withdrew and what your required minimum distribution really was!


IRA Mistake #7:
Forgetting the Contribution Deadline

December 31 is the last day of the year, right? But not when it comes to contributing to your IRA! You have until April 15 of the following year, or the day that you file your tax returns, to make a contribution to your IRA for that tax year.

Remember, to make the most of your IRA contribution, we recommend that you fully fund your IRA as early in the year as possible. But when it comes to making IRA contributions, late is better than never!

Don't make one of the key IRA mistakes by forgetting about that extended contribution deadline!

IRA Mistake #8:
Mishandling an IRA Rollover
If you are switching jobs or you are an IRA beneficiary, you'll need to roll over those IRA funds. IRA rollovers don't have to be confusing or complicated, but you do need to follow some very specific rules.

Here's how to avoid two common IRA rollover mistakes. First, your rollover must be completed no more than sixty days from when the money is withdrawn from the original account. Anything not rolled over within those sixty days becomes 100% taxable income. You don't want that to happen!

Second, remember that you are only allowed one rollover - into or out of an individual IRA - per year. There is no bending of this rule, so follow it closely or you'll get stuck paying a hefty penalty!

IRA Mistake #9:
Not Knowing Spousal/Non-Spousal Inheritance Rules
One of the big IRA mistakes is not realizing the difference between inheritance rules for spousal and non-spousal beneficiaries. If you are a spousal beneficiary, you can either switch the name on the IRA or roll the funds directly into an IRA you already have. Either way, the money is viewed as if it has been yours all along (you can contribute to it and will be required to withdraw from it).

If you are a non-spousal beneficiary, the money in the IRA is still yours, but you are not able to roll it over to your own IRA, and you are not allowed to contribute to it.

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