Avoid These Common IRA Mistakes

According to Cerulli Associates, Individual Retirement Accounts (IRA) currently represent the largest segment of the retirement market with about $9.2 trillion in assets at the end of 2017.  IRAs are expected to increase to $12.6 trillion over the next five years.   Rollovers from 401k plans account for most of the growth in IRA assets.

With such a large percentage of our retirement assets held in IRA accounts it’s important to understand the rules and opportunities to maximize your IRA assets.  Below are some tips on how to avoid common IRA mistakes.

• Avoid Rollover Mishaps – Money moved from an employer’s retirement plan should be transferred directly from the 401k plan to the custodian of your IRA.  The check should be made payable to the custodian of your IRA account, not to you.  The IRS does allow for one rollover every 12 months, where you take direct control of the funds and move them into an IRA within 60 days without taxable consequences.   However, this should be avoided because the full amount will become taxable if the money is not re-invested within 60 days.

Furthermore, distribution of 401k or IRA assets prior to age 59 ½ generally results in a 10%                    penalty unless you meet one of the IRS exceptions.

• Follow IRS Income Limitations – There are income limits on who can make contributions to deductible IRAs and Roth IRAs.  A contribution made when your income exceeds these limits will result in an annual penalty for every year the excess contribution remains in your account.

• Name Beneficiaries – Upon your death retirement accounts with designated beneficiaries are distributed directly to your heirs without delay and without going through probate.  

• Maximize Contributions but Don’t Exceed Contribution Limits – Take advantage of the tax benefits of an IRA by increasing contributions up to the new limit every year.  When you reach age 50 start making catch-up contributions. The IRA contribution limit for 2019 is $6,000 with a catch-up contribution of $1,000 if you are 50 or older.   

If you accidently make contributions in excess of the limits be sure to remove the excess before the tax filing deadline to avoid penalties.

• Understand Inherited IRAs – If you inherit an IRA from your Spouse you can transfer the funds to your own IRA account.  If a non-spousal traditional IRA or Roth IRA is inherited, RMDs generally must begin by December 31^st in the year after the death of the owner.  An option to distribute the full amount within 5 years is also available if the owner was under 70 1/2.

• Timely Required Minimum Distributions – You must begin taking RMDs every year once you reach 70 1/2.  You have until April 1^st the year after reaching 70 1/2, to make your initial distribution and December 31^st each subsequent year.   Failure to take your RMD results in a 50% penalty on the amount that should have been withdrawn.  An RMD is not required on a Roth IRA, during the owner’s lifetime.