By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®
There are about a dozen common and costly mistakes that I can immediately think of that people make with their Individual Retirement Accounts. Over the next several weeks, I’ll go through them as space allows.
Not Contributing. When is the best time to start saving? The answer is now: you can’t change the past. If you qualify but have not been taking full advantage of the IRA tax opportunity that congress has given us, start now. Einstein called compounding the eighth wonder of the world. That was even before the Employee Retirement Income Security Act of 1974 (ERISA), which among other things, gave us the IRA! Add inherent tax deferral of the IRA to the compounding growth that may occur and you have the potential to build something significant. If you are over 50, you can make an extra $1,000 “catch up” contribution each year to either a ROTH IRA or a traditional IRA, or a combination of the two. Even a non-working spouse can contribute to an IRA, as long as a joint tax return is filed and one spouse earns at least as much as is being contributed to all IRAs of both spouses in a given year.
Excess Contributions. That means you contributed too much to your IRAs and/or ROTH IRAs. We had a client several years ago who was contributing to a ROTH IRA managed by an advisor at our firm. The client never told his advisor that he had another IRA that he was adding money to, and therefore did not realize the full extent of the IRA rules including limitations that apply to contributions on the aggregate of all an individual’s IRAs. That is a mistake punished with IRS penalties. Excess contributions can also happen if one deposits more money into their IRAs than they have earned in income for that year. For example, if you are over 50, you are allowed to make up to $7,000 in contributions to your IRAs in 2019, OR an amount equal to your earned income, which ever is greater. So, if your earnings total $5,000, and you contributed $7,000, you would have an excess contribution of $2,000. There is a 6% penalty for each year the excess contribution stays in the IRA. Contribution mistakes can also happen after age 70 1/2 , as current legislation prohibits traditional IRA contributions after that age. An ineligible rollover to an IRA can also cause an excess contribution, as can ROTH IRA contributions that are made when Modified Adjusted Gross Income exceeds income limits. If you find you’ve made an excess contribution, talk with your tax and/or financial advisor about how to correct the situation.
IRAs can be powerful tools preparing for as well as navigating through your retirement. They also have tax benefits upon inheritance that other inherited assets do not. The benefits surrounding IRAs may make the accounts well worth your efforts in building them. If you do not follow the rules along the way though, the mistakes can be costly.
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or email@example.com. www.SchulferAndAssociates.com Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.