Mistakes with your IRA - What Not To Do (Bankrate.com)

retirement

Avoid these 8 common IRA mistakes

By Sheyna Steiner • Bankrate.com

Retirement » Avoid These 8 Common IRA Mistakes

Mistake No. 1: Live only for today

IRAs, or individual retirement accounts, may be trickier than you think. And what you don't know can cost you money.
Many of the most common IRA mistakes occur simply because people don't know the rules governing these accounts -- of which there are many. Complex rules provide many opportunities for things to go awry, but the biggest mistake with IRAs may be not contributing to one at all.
"If you don't put anything in, you won't have anything at the end," says IRA expert Ed Slott, president of Ed Slott and Co., and author of "The Retirement Savings Time Bomb … and How to Defuse It."
Each year that you're eligible to make IRA contributions and don't is a chunk of retirement income lost. The most significant factor in the amount of money accumulated at retirement is the amount you save, not the rate of return on investments.
In general, "If you run the numbers, someone who doesn't skip contribution years versus someone who does, the person who doesn't skip years will end up with more money in retirement," says Ken Hevert, vice president of retirement products at Fidelity Investments.

Mistake No. 2: Missing tax-free growth

The most widely used types of IRAs are the Roth and the traditional IRA.
Both accounts allow annual contributions of $5,500 in 2013, but they receive different tax treatment. In a nutshell, Roth IRA contributions are made with after-tax money, while contributions to a traditional IRA may qualify for a tax deduction for the year the contribution was made.
With the Roth, taxes are paid on the front end so that in retirement all distributions, including interest and earnings, are tax-free. Conversely, the traditional IRA generally gets a tax advantage at the time the contribution is made, but distributions are taxed as ordinary income in retirement.
There is an exception to that rule. High earners who are covered by a retirement plan at work may not qualify for a tax deduction.
Big moneymakers are hemmed in on the Roth side as well.
Income limits prohibit high earners from contributing directly to a Roth. A married couple who files taxes jointly and earns more than $188,000 per year cannot contribute to a Roth, and single people earning more than $127,000 are also prohibited.
But all is not lost. Read on to see how to sidestep these apparent obstacles to IRA investing.

Mistake No. 3: Lost opportunity due to ignorance

Make too much money to contribute to an IRA? You can get around this problem.
High earners can still take advantage of the Roth IRA by contributing to a nondeductible IRA and then converting to a Roth. A nondeductible IRA is simply a traditional IRA for which there is no tax deduction, and it is available to almost everyone with wages or self-employment income.
"I do that myself. I make too much to contribute to a Roth, so I can contribute to a nondeductible IRA and convert it to a Roth," says Slott.
"It's really just moving money from a taxable pocket to a tax-free pocket. Why wouldn't everybody do it to shelter their money from future higher taxes at no cost?" he says.

Mistake No. 4: Messing up RMDs

IRS rules call for required minimum distributions, or RMDs, from traditional IRAs beginning at age 70½. Failing to take the entire amount required can lead to stiff penalties.
"The IRS can charge a tax penalty of up to 50 percent of the distribution. So it could be quite severe," says Evan Shorten, CFP, president of Paragon Financial Partners in Los Angeles.
With a Roth IRA, no minimum distributions are required during your lifetime. If you pass on and leave the Roth to a nonspouse beneficiary, that person will be required to take distributions based on their own life expectancy if they choose to stretch the tax advantage of the retirement account until the end of their own life.
Beneficiaries of traditional IRAs who choose the stretch option are subject to the required minimum distribution rules as well and face the same 50 percent penalty for neglecting to take the full distribution.

Mistake No. 5: Contributing too much

The IRS limits the amount that may be contributed to a Roth or traditional IRA in any one year. For 2013, the contribution limit is $5,500. For the 50 and older crowd, the limit is $6,500.
With contribution limits strictly controlled, putting in more than the allowed amount can trigger a penalty -- to the tune of 6 percent on the excess each year.
There are several ways to run afoul of this rule, not the least of which is simply forgetting you made a contribution earlier in the year.
Excess contributions can occur by funding an IRA after age 70½, contributing more than your taxable income for the year or contributing on behalf of a deceased individual.
"Some people may have gotten into the routine of contributing to a personal and spousal IRA, and for whatever reason, the spousal IRA continues after they're deceased," says Fidelity's Hevert.
Luckily this mistake is easily remedied as long as you catch it before taxes are filed.
"Get it out before you file and no harm, no foul," Hevert says.
"Another (option) is to essentially carry that contribution to another year, and have that count toward that tax year's contribution amount -- but you have to document that with the IRS," he says.

Mistake No. 6: IRA rollovers gone wrong

Unfortunately, paying someone to take care of your financial transactions is no guarantee of perfection.
"Advisers are generally not proactive, and they don't check things," Slott says.
Administrative transactions, such as transferring a retirement account, require attention to detail. Whether you're rolling over a 401(k) or transferring your IRA to a new custodian, not only do you need to pay meticulous attention to those little check-boxes; the customer service representative at the receiving institution also needs to be on alert.
"We see cases on this all the time. They find out the money never got to an IRA, the broker or bank moved the money and hit the wrong box, and it went to a regular account. That's a taxable distribution," says Slott.
Facing the prospect of losing the tax shelter of the IRA as well as paying the taxes owed on the entire account balance, an IRA owner has only one way of remedying rollover mistakes like these.
"You have to go to the IRS for relief, and that is going to be expensive and take six to nine months to get a decision," Slott says.

Mistake No. 7: Blowing the deadline

A trustee-to-trustee rollover isn't the only option for moving between retirement accounts. Individuals can take money out of their IRAs or take a distribution from their 401(k) when they leave an employer and put it back into a qualified retirement account without tax consequences -- as long as they do so within 60 days.
"That may seem like a long time, but a lot of people blow it. And another thing: You can only do that once every 365 days, not calendar year. Some people can lose their entire IRA because they did two rollovers in a year and didn't realize it," Slott says.
The safest bet is to do a direct transfer from one institution to another. When everything goes correctly, the money never comes out of a retirement account because the check is written to the receiving institution, not an individual. In the end, however, the burden is on the account owner to make sure their new account is set up correctly.

Mistake No. 8: Neglecting beneficiary forms

Properly filling out a beneficiary form is a pain. Personal information from the beneficiaries is needed, including birth dates and Social Security numbers. It's so easy to focus on just getting the account open and then taking care of the beneficiaries later, someday -- it's on your to-do list.
"When you open an account or transfer or convert, you need new beneficiary forms. Most don't check those things because they think someone else did or it's in their will," Slott says.
Not having a beneficiary form won't affect you after you die, obviously, but "your beneficiaries can lose valuable tax benefits, they won't be able to stretch (distributions) over their lifetime, so a lot of benefits can be lost -- or it can go to the wrong person," Slott says.
As with many aspects of these accounts, failure to properly check the details can come back to haunt you or your loved ones. When in doubt, consult a professional. But don't be afraid to double-check their work: it is your life savings, after all.

Cheap Insurance that is Really Worth It - Umbrella Policies (DailyFinance.com)

Umbrella Insurance Policies: Why You Might Want That Extra Protection

by Michele Lerner Jul 5th 2013 5:00AM

Dan Ramsey, an independent insurance agent with Brandt, Ramsey and Associates in Alexandria, Va., says the most memorable claim on an umbrella insurance policy he was involved in was made by a small business owner who had purchased a $2 million policy.

"After attending a Christmas party, my client got involved in a fatal auto accident where the other driver was killed," says Ramsey. "My client was given a breathalyzer on the scene and exceeded the legal alcohol limit. He was sued for something like $1.25 million by the claimant's family and was legally liable for the damages, which were paid by the umbrella policy. The client was otherwise an upstanding citizen with no past history of these kinds of events."

Protection Beyond the Usual

While its easy to assume that only a rich person could need that much insurance coverage, you'd be surprised at how important an umbrella policy can be for an average member of the middle class. For example, if you have a car insurance policy with liability coverage, you may think you have enough protection in case of an accident. But a lawsuit like the one described above could quickly exceed the $100,000 or $300,000 insurance payout.

An umbrella policy provides an additional layer of insurance, typically $1 million or $2 million, above your auto insurance and your home insurance liability coverage. Consider the following scenarios where an umbrella policy would have been helpful:

• A $1.2 million settlement in New Jersey where an underinsured driver hit a policeman who was completing paperwork at a traffic stop. The driver had to pay legal fees for his defense as well as the settlement.
• $1.76 million was awarded to a mother and her 8-year-old child in Florida after a wave runner accident injured both of them. The mother needed corrective surgery after the initial injuries were treated.

Although 85 percent of umbrella insurance claims are related to car accidents, the policies offer protection against accidents that occur at your home, too -- for example, in case someone falls down your stairs and sues you, or your balcony collapses during a party. Many people opt for an umbrella policy because they have a pool or a trampoline on their property and fear the consequences of a child getting injured.

Then there's coverage for incidents you may not have even considered, such as accidents while you're driving in another country, or while you're on vacation and have rented a boat or Jet Ski.

Another important feature of these policies is protection in a lawsuit against you for slander or defamation of character, or for decisions you might have made as a volunteer member of a nonprofit board. If you regularly blog about controversial topics or rant on Facebook, an umbrella policy just might be a good idea to protect your assets from a litigious individual who believes you've damaged their reputation.

That may sound unlikely, but it's not unheard of. In 2009, a high school student sued four other students and their families for $3 million because of derogatory comments the other students made about her on Facebook. While the lawsuit was eventually dismissed, reaching that verdict took two years and required considerable expenditures by the families. An umbrella policy can cover expenses related to such lawsuits.

You Have More to Protect Than You Think

You may be assuming that if you don't have $1 million to lose, you don't need an umbrella policy. Unfortunately, if you are sued by someone who falls down the stairs at your home or whom you injure in a car accident, you can be sued for more than just what you have in the bank.

Your retirement funds, investments, savings and even your future earnings are at risk if a judge allows someone to garnish your wages to pay off a settlement. In some states, the equity in your home can be part of the judgment and you would be forced to sell your home to pay someone who sues you.

If you own a house and have a retirement account or other investments, an umbrella policy of $1 million or more should be part of your financial plan. Most insurance companies offer these plans in increments up to $5 million, and some go up to $10 million.

Insurance companies require specific levels of liability coverage on your auto and home insurance policies before they will approve an umbrella policy, typically:

• $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowners insurance policy
• $250,000 per person for bodily injury and $500,000 per accident on your car insurance policy
• $100,000 per accident for property damage on your car insurance policy

The average cost for a $1 million policy is $200 annually -- which you might find a relatively low price for the peace of mind and security it offers.

Michele Lerner is a contributing writer for The Motley Fool.