Marc A. Hebert's Money Sense: Here are some IRA mistakes to try to avoidBy MARC A. HEBERT
July 20. 2018 2:32PM
As IRAs can be a key part of your retirement savings strategy, setting aside time during the year to review the do's and don'ts of successful IRA management is a great idea. Here is a list of some of the key points:
. Failure to start.
Do you have either a traditional IRA or Roth IRA as part of your retirement strategy? Don't assume that because you have a retirement plan at work, you can't have an IRA, too. Get some advice and review your overall retirement options to see if IRAs are right for you.
. Waiting until the last minute to make your contribution.
The deadline for making an IRA contribution is the tax return filing deadline for that particular year. For example, if you wanted to make a 2018 contribution, you will have until April 15, 2019 to do so.
While there might be some reasons to wait - making sure you are eligible is one - putting the funds into the IRA as soon as possible means more time for the earnings on the funds to compound tax deferred or tax free in the case of a Roth IRA. As little as 15 months can add up over time. If you are not making a single lump sum contribution, starting early will give you a chance to make the contributions over time on a monthly basis.
. Not considering a spousal IRA.
Having earnings is one requirement for making an IRA contribution. For some couples, one may not be working. As long as the earning spouse has enough earned income to cover the total amount contributed for the two of them assuming you qualify, the couple can make IRA contributions for both.
. Not comparing the advantages of traditional IRAs and Roth IRAs.
The biggest difference between a traditional IRA and a Roth is the way taxes are handled on both types of IRA investments. If you put money in a traditional IRA, you potentially will be able to deduct that contribution on your income tax return. Keep in mind that doing so means that you pay taxes on it when you take distributions from the IRA. With a Roth, you don't receive the tax deduction for those contributions. But, when it is time to take the money out, you won't have to pay taxes on it either.
Another point to remember is that your contribution doesn't need to be made solely to one or the other - perhaps allocating one-half the contribution to a traditional IRA and the other half to a Roth IRA is the best strategy. Just be sure to watch the overall contribution limits.
. Forgetting the modified adjusted gross income and contribution limits for IRAs.
These limits change each year. It is worthwhile to check this because if you make an excess deposit you might be subject to penalty. The IRS website, www.irs.gov, is a great source for this information.
. Failing to make sure your beneficiaries are correct.
Check that your beneficiaries are always current and you understand how your primary and contingent beneficiaries are designated on your particular IRA.
. Not using your tax refund.
Did you know you could deposit your tax refund directly into your IRA? You can do this for health and education savings accounts as well. Just make sure to file your taxes early to ensure the contribution will be in the IRA account by the April 15 deadline. Check with the financial institution to ensure that they will accept your direct deposit. It is also a good idea to verify your account, routing number and contribution year.
. Withdrawing money early from an IRA.
Money taken out of an IRA is subject to income taxes and a penalty if you are under age 59½ years old and, subject to certain limitations, if the money is not put back into an IRA within 60 days.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.