In July of 2013, the Worker’s Retirement Institute reported that the average value of IRAs (Individual Retirement Accounts) in the United States fell to less than $28,000 the lowest number in a decade. This means Americans, some unemployed, must work even harder to pay for their retirement.
The sad part is that most people’s retirement savings are dismal because of silly IRA mistakes that cost real money. Individual Retirement Accounts confuse people, but many workers miss out on tens of thousands of dollars in their lifetime because of common errors.
How many of these 5 mistakes do you make with your IRA?
1. Not Comparing Roth vs. Traditional IRAs
What? You still don’t know the difference? Don’t worry. If you set your IRA up years ago, your bank or financial planner likely set you up with a Traditional IRA. Today, a Roth IRA can offer significant tax advantages to most people. This isn”t true in every case, but in the long run a Roth IRA offers a better tax position when you eventually retire. If you’re just starting an IRA and don’t have the time to research, go with a Roth. (Self-employed business owners should look into the benefits of SEP accounts.
2. Thinking you Missed the Deadline
Most people think 2016 ends on December 31st. Nope! Every year, the government gives you until April 15th, the day most taxes are due, to make your maximum IRA contribution for the previous year. Don’t forget to make your contribution before you file those taxes. Also, did you know you can deposit your tax refund directly into your IRA?
3. Not Reaching the IRA Contribution Limits
Along with your 401k, your IRA is your most important investment vehicle for retirement. The more you contribute each year, the more you save in taxes and the larger your retirement savings. Because of the magic of compound interest, shorting your IRA even a few hundred dollars this year can mean the difference of thousands of dollars later on. The IRA contribution limits for 2015 and 2016 are $5,500. IRA owners age 50 or older can make an additional $1,000 catch-up contribution in 2015 and 2016. Also, know the maximum you can contribute based on your income by reading about maximum income limits for Individual Retirement Accounts.
4. Early Withdrawal
You already know that IRAs are designed not to be touched until you turn 59½. Doing so will incur the wrath of the IRS and you’ll be forced to pay taxes on income and investment earnings. But if circumstances demand that you withdrawal the money, be sure to put it back within 60 days to avoid penalties. Most people don’t realize that federal regulations give you a 60 day grace period to pay back any IRA savings that you withdrew.
If you’re reading this and thinking about starting an IRA, the best time to do so is today. Putting your retirement plans off until tomorrow can cost you more than all the other mistakes combined. There is always an excuse and never enough cash flow. But by waiting you are dooming yourself to repeat the mistakes of yesterday. Talk to a qualified financial planner today!