In these difficult economic times it’s tempting to start pulling money out of your individual retirement account, or IRA. Most people are aware that this particular act comes with a hefty federal tax penalty but are unaware of other types of mistakes. To fully protect your IRA and keep it growing toward your retirement, be cautious and avoid these dangerous mistakes.
1. Misunderstanding withdrawal taxes – Every time you withdraw money from your IRA you’ll have to pay taxes. At age 70 ½ it’s mandatory that you begin to withdraw funds so be sure to set aside the necessary funds to take care of the taxes. And pay attention to the mandatory minimum withdrawal, otherwise you’ll be handed a stiff penalty.
2. Misunderstanding the complexity – IRA tax rules are complicated. To avoid costly mistakes, it’s much more efficient to hire a seasoned tax attorney that specializes in IRAs and the stipulations that go with them.
3. Skipping years – This is simple math. For every year that you don’t contribute to an IRA that’s another retirement year without that money. Don’t let the rules and regulations of IRAs scare you. It’s much sounder to invest than it is not to. But….
4. Overinvesting is a problem – IRAs have a maximum contribution limit of $5,000 for most and $6,000 for people over 50. If you put more than that into a traditional IRA, there’s a penalty for that.
5. Assuming the Roth IRAs and the traditional IRAs are the same – There is a serious tax difference between the traditional and the Roth IRAs. With the Roth, the taxes are taken out as you move along meaning that by the time you retire, taxes aren’t an issue. The traditional, on the other hand, is treated like an income and as such is subject to income tax rates once you begin to withdraw from it.
Talking about traditional IRA penalties seems much like the Apple commercial with the tagline “There’s an app for that.” With IRAs it seems that at every turn “There’s a penalty for that.” Unfortunately the penalties of not abiding by the strict rules and regulations of the IRA are costly at best and at worst potentially devastating. The best way to avoid making mistakes is to hire a professional that understands the ins and outs of individual retirement accounts whom you trust to protect you at retirement time.