Saving more for retirement is always a good idea, especially now. In 2009, the Employee Benefit Research Institute estimated that Individual Retirement Accounts (IRAs), a cornerstone of retirement savings, sank to a median value of less than $29,000 post-financial meltdown.
That leaves many Americans working even harder to recoup their losses and stay on track to make retirement a reality.
The good news is that many people can increase their saving potential simply by learning more about IRA dos and don’ts. Saving as much as possible, handling rollovers correctly and avoiding costly penalties are the keys to success.
“There’s no question that saving through an IRA is a strategic move, but it’s not quite as simple as ‘set it and forget it,’” says J.J. Montanaro, a certified financial planner with USAA. “Staying aware of what to do and what not to do can really pay off, especially now, when you have the opportunity to invest and potentially save on your tax bill.”
Montanaro outlines eight of the most common mistakes IRA investors make when it comes to making the most of this retirement-saving tool.
• Thinking you’ve missed the deadline. Though 2009 is over, it’s not too late to make your IRA contribution count toward this year’s tax bill. This year, you have until April 15 to make “2009” IRA contributions and claim eligible deductions on your tax return.
• Not contributing enough. Contributions to a traditional IRA are tax deductible, within limits, so you can help secure your future and cut this year’s tax bill at the same time. If you’re younger than 50 years old, you can contribute up to $5,000 annually. Maxing it out makes for maximum tax savings.
• Not playing catch-up. Age does have its rewards. If you’re 50 or older, you may be eligible to contribute an extra $1,000 (up to $6,000 per year) to an IRA account. This “catch-up” contribution offers a chance to kick your savings into overdrive.
• Assuming you can’t contribute. If you’re a stay-at-home spouse, you can still open an IRA as long as contributions from both spouses don’t exceed your combined taxable compensation.
A “spousal IRA” is especially handy when the working spouse is already covered by an employer retirement plan and can’t deduct IRA contributions. What you can deduct will depend on your Modified Adjusted Gross Income (MAGI), but every bit counts.
• Rolling the wrong way. If you’ve recently switched jobs or lost your job, you can roll the funds from your old employer’s retirement plan into an IRA. Just be sure the transfer is made directly from one custodian to the next—a direct rollover.
If the payout goes to you first, it will be subject to a mandatory 20 percent withholding tax. Then, you’ll have only 60 days to move the funds you received, plus the 20 percent that was withheld, to a new account or you’ll have to pay income taxes on the distribution, plus an early withdrawal penalty if you’re not at least age 591?2.
• Not considering a Roth. You might be able to save more on taxes in the long run by contributing to a Roth IRA instead of a Traditional IRA depending upon your tax situation.
Roth IRA contributions aren’t tax deductible, but the Roth can provide tax-free withdrawals come retirement time. And starting this year, the income restrictions to convert a Traditional IRA to a Roth IRA have been eliminated, opening the door to millions more investors.
Ask a trusted financial adviser if opening or converting to a Roth IRA would be the right move for you. It’s important to keep in mind that conversions from a Traditional IRA to a Roth IRA are subject to ordinary income taxes, so it’s recommended that you consult with a tax advisor regarding your particular situation.
• Withdrawing too early, Your IRA is designed to remain untouched until you reach age 591?2. If you make a withdrawal from your Traditional IRA before then, you’ll have to pay taxes on the income and investment earnings, and fork over a 10 percent penalty, with some exceptions.
While a Roth IRA allows you to withdraw your contributions, not including earnings, at any time without taxes or penalties, you’ll thank yourself later for not raiding the piggy bank.
• Procrastinating. More than any technicality, it’s plain old procrastination that hurts investors the most. Whether it’s uncertainty in the markets, cash flow concerns or the rising costs of college, there will always be excuses to put off this year’s IRA contribution.
But time-honored investing principles show that consistent contributions—through good times and bad_provide the clearest path to long-term investing success. So make the commitment and take action to help secure your financial future now.
For complete IRA details, visit www.irs.gov and search for Publication 590. When in doubt, you can contact professional financial advisors at USAA through www.usaa.com or at (800) 531-USAA (8722) to help you determine how investing in an IRA can help you meet your financial goals.
—Courtesy of ARAcontent