What are The Biggest Roth IRA Mistakes?

Savers and retirees frequently make IRA mistakes and lose out on valuable opportunities. To help you sidestep some of the most common errors and get the most out of your IRA investments, Kiplinger's recent article, "Don't Make These Common IRA Mistakes," discusses the most common blunders and how to avoid them.

Failing to Plan for the "Second Half." One can think of retirement planning as a game with two halves. You accumulate wealth in the first half and withdraw it in the second. Some people only play the first half of the game and concentrate on stashing away as much money as possible in their IRA. However, with retirement saving, it's not how much you have; it's how much you can keep after taxes. To prepare for the second half of retirement, it's essential to have a plan to get that money out at the lowest possible tax costs. You should start the plan by putting money in an IRA or other retirement account.

Converting to a Roth All at Once. If you think your tax rate will be higher when you retire than it is currently, converting a traditional IRA to a Roth IRA may be wise. Ultimately, taking that step may lower the total tax you owe on those funds (e.g., future growth will be tax-free). However, a Roth conversion will result in a tax bill on your next return. The mistake people make is believing they must convert the entire account at once.

Exceeding Roth IRA Income Limits. There are annual contribution limits for both traditional IRAs and Roth IRAs, but for Roth IRAs only, there are also income limits. If you're single, the amount you can contribute to a Roth IRA is gradually reduced to zero if your modified adjusted gross income is between $129,000 and $144,000 ($204,000 to $214,000 for joint filers). It's up to you to keep track of the Roth income limits, and if you're over the limit and still put money in a Roth IRA, the IRS could hit you with a 6% penalty on any excess contributions. However, if you make that mistake, you may be able to avoid the penalty either by timely withdrawing the excess funds or recharacterizing your payment as a traditional IRA contribution.

Doing Indirect Rollovers. Some people get in trouble when they try to transfer funds from one retirement account to another. If you take money out of an IRA, and the check is in your name, you have 60 days to roll that money over into another retirement account before the withdrawn funds are deemed taxable income. That's known as an indirect rollover. You can only do one indirect rollover per year for IRA-to-IRA transfers. Only do direct rollovers, where the money moves from one retirement account to another directly, without anyone touching the money in between.

Forgetting about RMDs. You must begin taking required minimum distributions (RMDs) when you reach age 72 (73 if you reach 72 after Dec. 31, 2022). People will miss an RMD or only take it for some accounts subject to the RMD rules. Other people miscalculate and need to withdraw more money. This mistake means the IRS could hit you with a 25% penalty (down from the previous 50% penalty) for violating the RMD rules. However, the IRS may reduce the penalty to 10% if you make a timely correction.

In conclusion, while Roth IRAs offer significant advantages for retirement savings, it's crucial to be aware of the potential pitfalls and common mistakes associated with them. By understanding and avoiding these errors, you can maximize the benefits of your IRA investments and ensure a more secure financial future. If you have any questions or concerns about your Roth IRA or any other aspect of estate planning, don't hesitate to reach out to an experienced Austin estate planning attorney. They can provide you with the guidance and expertise you need to make informed decisions and protect your hard-earned assets. Remember, it's always better to be proactive than reactive when it comes to retirement planning.

Reference: Kiplinger (July 25, 2022) “Don't Make These Common IRA Mistakes”