6.16.20

7 IRA mistakes to avoid

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Make sure you understand how individual retirement accounts work in order to maximize your savings and earnings.

Individual retirement accounts (IRAs) are one of the most widely used investment tools for good reason. No matter when you start saving, you’re giving your money time to grow. Plus, with most plans, the IRS allows you to defer paying taxes on income saved for retirement until you withdraw the money. Yes, there are ups and downs in the stock market but over the last 90 years, the stock market has trended upward. Unfortunately, there are some common mistakes people make that can cost them big. Here are seven IRA mistakes you should avoid.

Not taking advantage of your employer’s match

If you have an employer that matches contributions or offers to deposit a percentage of your salary in a plan like a SIMPLE IRA and you don’t participate, you are passing up free money. Literally.

Many people find that that setting aside 3% of their pre-tax income has little effect on their take-home pay. That’s because the contribution reduces taxable income. Use this calculator to see how retirement contributions would affect your paycheck.

Thinking you make too little/too much to contribute to an IRA       

IRS rules for contributions don’t change based on income. In fact, you don’t even have to have a paying job to contribute to an IRA. A non-working spouse can save for retirement, too.

Some people with high incomes are ineligible to contribute to a Roth IRA, but they can still take advantage of a traditional IRA.

For individuals, 2020 contributions to traditional and Roth IRAs cannot be more than $6,000. If you’re 50 or over, you can save more—keep reading.

Not taking advantage of “catch up” contribution limits

Let’s be frank, there are a lot of things that can prevent us from saving for retirement. Raising children, buying a home, starting a business, covering medical expenses and paying tuition to name a few. To give people a chance to accelerate retirement savings later in life, the IRS allows individuals 50 and over to make annual catch-up contributions.

If you’re age 50 or older, you can contribute an additional $1,000 to your IRA for a total of $7,000.

Believing you can’t access IRA money until you retire

Yes, retirement accounts are designed to be used when you retire. In general, you have to wait until age 59½ to withdraw fund from IRAs without a 10% penalty in addition to income tax. However, there are exceptions to the rules.

Early IRA withdrawals are permitted for some narrowly defined situations, such as a first-time home purchase, higher education, if you become permanently disabled, or for the birth or adoption of a child.

Usually you can’t take a loan from either a traditional or Roth IRA but these are not usual times. This year’s CARES act allows you to take a distribution and repay it later if you are affected by the coronavirus.

Roth IRAs, which are funded with taxed income, allow you to withdraw original contributions (but not earnings) penalty- and tax-free at any time.

If you want to tap into IRA funds before age 59½, consult with an accountant or your tax attorney to make sure you follow the rules. Learn more about the limits.

Planning to leave money in an IRA as long as you want

With traditional IRAs, IRS rules say you must start taking required minimum withdrawals (RMD) by April 1 of the year after you reach 72. Under old rules, RMDs started at age 70½; changes made by the SECURE Act in 2019 allow anyone whose 70th birthday is July 1, 2019, or later to delay RMDs until age 72.

The exact amount of your RMD depends on your age, IRA balance and life expectancy. You’ll find the IRS’s RMD worksheets here.

Again, there are different rules for Roth IRAs; they do not require minimum withdrawals at age 70½. In fact, withdrawals are not required until after the death of the owner.

Overlooking the value of a Roth IRA

We’ve mentioned Roth IRAs a couple of times but you may not know how to use this valuable retirement saving tool. Unlike regular IRAs, Roth IRAs are funded with income that is taxed. The beauty of a Roth is that when you take withdrawals when you retire, you don’t owe income taxes on the money. Reducing your tax bill like this can make your retirement budget go a lot further.

Not naming a beneficiary

Make sure your beneficiary information is up-to-date so your money goes where you want it to when you die. This can be your spouse, trust, kids, grandchildren or an organization that’s near and dear to your heart. Keeping your beneficiary information updated will save your heirs time, money and hassle.

Get IRA answers

Now that you know seven IRA mistakes to avoid, it’s time to look at what you can do next. Whether you’re just starting your career or plan to retire soon, Consumers can help you reach your goals with an IRA to suit your needs. And if you like planning on your own, check our Retirement Planning Calculator.

Consumers provides banking services for more than 100,000 members. If you have banking questions, call us at 800-991-2221. We make it easy to bank how you want, when you want.

Federally insured by NCUA

Are you retirement ready?

Consumers can help you reach your goals with an IRA to suit your needs.

Learn more

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