9 Mistakes People Make with their IRA

January 29, 2010

People make a lot of mistakes when it comes to IRA and 401(k)-related decisions. And I can’t blame them. The tax code is obscenely complex. That said, there’s no need for you to make these mistakes.

1. Converting to a Roth when it makes no sense Just because you can convert your traditional IRA to a Roth IRA doesn’t necessarily mean you should do it. Generally speaking, if you expect your tax bracket in retirement to be lower than your current tax bracket, converting isn’t a good idea.

2. Thinking tax rates won’t change between now and 2040 Of course, if you won’t be retiring any time in the next few decades, it’s nothing short of impossible to say what your retirement tax bracket will be. Tax brackets change as a function of both economic and political circumstances. Since we cannot easily predict what tax rates will look like 20 or 30 years in the future, it may be a good idea to tax diversify. That is, put some of your retirement savings in tax-free accounts (like a Roth IRA) and some in tax-deferred accounts (like a 401(k) or traditional IRA).

3. Not understanding how a Roth IRA works Sometimes, people neglect to make an IRA contribution because they don’t want to tie up the money until they’re 59½. What many investors don’t know is that contributions to a Roth IRA can be withdrawn at any time–free from tax and free from penalty. It’s only for distributions of earnings (and amounts converted from a tax-deferred account) that the various Roth IRA withdrawal rules have to be met.

4. Missing out on the Retirement Savings Contribution Credit It doesn’t get much press, but the Retirement Savings Contribution Credit can be a real boon for middle-class investors. In short, if your Adjusted Gross Income is below a certain level ($55,500 for married couples in 2009), you may qualify for a tax credit equal to a percentage of contributions you made to a retirement account. Tip: Investors who are just barely ineligible for the credit may be able to contribute to a traditional IRA, thereby reducing their income to the point where they’d qualify.

5. Funding your IRA just before the deadline every year You have until April 15, 2011 to make your 2010 IRA contribution. Of course, if you make your contribution as early as possible rather than as late as possible, you give your money more time to grow. Giving each of your contributions an extra 15.5 months of growth can make a startlingly large difference in your account balance when you finally retire.

6. Missing out on your catch-up contribution Once you reach age 50, you’re allowed to make an additional “catch-up contribution” to your IRA. It’s all too easy to forget about this for the first year or two that you’re eligible–especially if you make your IRA contributions via automatic monthly deposits.

7. Thinking you can’t contribute because only your spouse is employed Many one-income families think that they can only contribute to an IRA for the working spouse. That’s not true. In most cases, as long as one spouse is working and earns more than double the current IRA contribution limit, each spouse can contribute to an IRA. (Note: Reductions in contribution limits for high-income taxpayers still apply.)

8. Forgetting to take advantage of your self-employment income Between the popularity of blogging and other online businesses, it seems like everybody has a “side hustle” these days. What many people overlook is that their self-employment income qualifies them for additional types of retirement accounts. By opening a SEP IRA, SIMPLE IRA, or solo 401(k), you may be able to significantly increase the maximum amount you can contribute to retirement accounts this year.

9. Having your previous significant other listed as your IRA beneficiary No explanation needed–though you’d be surprised how often this happens.

What mistakes have you made (or avoided)? It’s always good to learn from mistakes. Especially when they’re somebody else’s. Have you made any IRA or 401(k) mistakes that you’d be kind enough to warn the rest of us about?

About the Author: Mike Piper is the author of Investing Made Simple. He also blogs at The Oblivious Investor.


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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13 Responses to 9 Mistakes People Make with their IRA

  • Vicki

    With high Sep IRA maximum caps, seems to me that this plan offers opportunity for rapid savings.

  • Erik

    Didn’t realize that my side gigs would qualify me for the SEP IRA as referenced in #8. That’s a good point that I need to consider once I’m ready to start maxing out my retirement contributions.

  • Daddy Paul

    Good read. The one thing I would add is bad investments. Single stocks, penny stocks, leveraged investments.

  • Ken

    I have not notified a previous state employer pension plan of my address change. I need to call them this week. Will I? It’s questionable.

  • Mike Piper

    “At least you don’t have to be there to see your money go to someone you don’t want it to.”

    Hah! Indeed. Probably doesn’t offer much comfort to one’s surviving spouse though.

  • Evolution Of Wealth

    I would say #4 is the one that most people don’t know about but then again most people don’t need to. From my experience, #9 is the most common mistake. It also could be argued that it’s the biggest. Unfortunately when it comes into play it is too late to do anything about it. At least you don’t have to be there to see your money go to someone you don’t want it to.


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