Managing individual retirement accounts, or IRAs, may be a little trickier than you think.
Bach, James, Mansour & Company doesn’t sell retirement account products, but we see thousands of retirement accounts while preparing our clients’ tax returns. We’ve seen a lot of mistakes, and have helped countless clients get out of hot water with the IRS.
This neutrality allows us to help clients make the right retirement planning decisions, and even recommend financial planners and products to help improve results. Based on what we’ve seen in 2015, here are five IRA planning mistakes to avoid:
- Live for today rather than saving for tomorrow. In an American Century survey of retirement plan participants, only 36% of participants aged 25-54 felt that they were saving enough money, or more money than needed, for retirement. 73% felt they should have better estimated retirement savings needs when they were younger. Are you saving enough? As Clark Howard says, saving just a penny of every dollar you earn can make a big difference. Call us and we’ll help you run some numbers.
- Wrong beneficiary designation. The beneficiary information form is always a pain to complete since it requires personal information such as birthdates and social security numbers. Make sure you have beneficiaries correctly defined (and updated based on marital status, etc.), so they can take full advantage of the tax and distribution benefits if you pass away.
- Rollover mistakes. Moving money from a company 401(k) retirement account to an IRA is called a “rollover.” A rollover may give you and your financial planner broader investment options, but please confirm that all those little boxes are checked correctly or you may end up with a taxable distribution. You have 60 days to complete the rollover (or pay back a distribution), and you can make only one rollover every 12 months. If you want to move more money, you’ll need to initiate a direct transfer.
- Overlooking spousal and catch-up contributions. Did you know that you can make contributions for an unemployed (or underemployed) spouse? If you are working, married, and have enough income to contribute, you may qualify. There are also additional contribution options once you reach the age of 50. At that point, the IRS allows you to “catch up” by increasing your IRA contributions $1,000 each year. Even more catch-up contributions may be available for those with business retirement plans like 401(k)s.
- Incorrect RMDs. Beginning at age 70 ½, the IRS requires you to take required minimum distributions (RMDs) from your traditional individual retirement accounts. If you don’t take out enough money, you may receive a tax penalty of up to 50% of the distribution. That sounds crazy, but Uncle Sam wants its deferred taxes. Even if you’re penalized, we may still be able to help you by working with the IRS to minimize penalties by distributing that money (and paying taxes) the following year.
You need to plan today if you want to get something back tomorrow
A number of years ago, Harvard Business School asked their MBA students whether they had set clear goals for their future. Only about 3% had goals and plans written down, and about 13% had unwritten goals. Ten years later, a follow-up interview found that the 3% with clear, written goals were earning 10 times more than the other 97%. If you’re wondering about the 13% with unwritten goals, they were earning twice as much as those without any goals.
Call us and let’s review your goals and build (or update) your plan. We want to stay unbiased by not selling financial products, but we can also recommend great financial planners to help you manage your retirement accounts. Don’t forget to take your RMD before the end of the year. Avoid the penalty, and avoid paying me to minimize your penalty!
Neal Bach, CPA