Less than one-fourth of Americans contribute to an Individual Retirement Account (IRA).1
And those who do often don’t take full advantage of its earning power. So how can you get the most from this tax-advantaged method for growing your retirement fund? Start by avoiding these four potentially costly mistakes.
Mistake #1: Not having an IRA.
An IRA earns interest, and then the interest earns interest, and over time this snowball effect can help you build a significant nest egg.
Furthermore, with a traditional IRA, you may be able to save on taxes now by investing pre-tax dollars, which lowers your current taxable income. Plus, earnings grow tax-deferred, so you don’t pay until you actually withdraw the money.
With a Roth IRA, you pay taxes now, but when you start making withdrawals, you won’t have to pay taxes on the interest you earned.
Mistake #2: Missing out on maximum contributions.
In general, you can contribute up to $5,500 per year to an IRA ($6,500 if you’re age 50 or older). If you’re not investing the full allowable amount, you’re essentially giving away free money, due to the interest you won’t be earning on the money you don’t contribute. Plus, remember that traditional IRA contributions can potentially reduce your tax bill this year.
• Tip: Consider making regular contributions throughout the year. This may lessen the risk of investing at an unfavorable time. Plus, it can help you to meet your investment goal, manage your cash flow throughout the year and avoid fees that may be associated with a large one-time contribution.
Mistake #3: Letting penalties pile up.
As with most investments — especially those so tied to your tax picture — there are plenty of regulations and restrictions. Here are three to beware of:
• Distributions before you reach age 59½ are fully taxable as ordinary income and subject to an additional 10 percent tax. (Some exceptions do exist.)
• Contributions in excess of the annual limit incur a 6 percent penalty.
• Taking less than the required minimum distribution once you reach age 70½ may be penalized with a 50 percent excise tax on the amount not distributed.
Mistake #4: Splitting up your IRA funds.
It’s not unusual for someone to have more than one IRA, or to have an IRA and a 401(k), often due to job changes. Because you’re likely paying fees on each account, consolidating could save you money every year — money that could be growing your retirement savings, instead.
• Tip: Before consolidating, check if there will be transfer fees and, if so, compare them against the total annual fees you pay to make sure you’ll ultimately save. And if you do consolidate, use a direct transfer so you retain tax-deferred status on your assets and avoid federal tax withholdings.
• Tip: If you retire or leave your employer for another reason, consider rolling your retirement plan directly into an IRA. If you inherit an IRA, talk with your Rabobank representative to discuss your options.
All the Right Moves
To help ensure you’re making the most of your IRA, take time to review it every year. Along with crunching the numbers, consider any changes in your life and your risk tolerance that might affect your investment choices. Then make adjustments where necessary.
• For complete details about IRA regulations, download Pub. 590 from the IRS website.
• For information about Rabobank’s traditional, Roth and rollover IRA options, click here.
• For a personal discussion about your current IRA or to open one, talk to your Rabobank representative at your local branch or call (888) 945-6600.
- “Many Americans Unaware of IRA Savings Option,” by Ann Carrns, The New York Times, April 4, 2012
The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.