Opening an IRA is one of the smartest ways to lower your tax burden and save money for retirement. Unfortunately, a lot of people make mistakes with their IRAs. Avoid these four IRA mistakes in order to get the most out of your account.
1. Not Reaching Your Contribution Limits
IRA contribution limits increase every few years to keep up with inflation. If you don’t change the amount you put into your IRA, then you aren’t taking full advantage of your account.
If you are under 50 years old, then you can add $5,500 to your Traditional or Roth IRA in 2016. If you are 50 or older, then you can contribute up to $6,500.
Inflation has been flat for the last several years, so there haven’t been any changes to contribution limits. That could change at any time, though. Make sure you pay attention to the latest contribution limits to make sure you are adding as much as possible to your retirement account.
2. Not Updating Your Beneficiaries
When you open an IRA account, you should designate beneficiaries who will get the money if you pass away. A lot of people forget to update their beneficiaries throughout life. That could mean your money goes to the wrong person or doesn’t get passed along at all.
It’s particularly important to update your list of beneficiaries after:
- You have a child
- You get married
- You get divorced
- One of your beneficiaries passes away
3. Not Opening a Spousal IRA
While it’s increasingly rare, there are still plenty of households that rely on income from one person. A lot of married couples assume that the non-working spouse can’t open an IRA. That’s not true.
Anyone can contribute to an IRA, regardless of that person’s employment status. If your spouse doesn’t have an IRA, now is the right time to start one for him or her. Otherwise, you’re missing out on tax savings and you may not have enough money to pay for retirement.
4. Forgetting to Take the Required Minimum Distribution
Once you reach 70.5, you have to start taking your required minimum distribution (RMD). If you don’t, then you will pay a 50 percent penalty on the amount that you should have withdrawn.
In addition to paying the penalty, you have to pay taxes on the amount. While you can’t avoid the tax, you can avoid the penalty by withdrawing the required amount each year.
Keep in mind that Roth IRAs are exempt from this. If you have a Roth IRA, you don’t have to withdraw or pay taxes on your withdrawals.
By avoiding these four common mistakes, you can maximize the benefits of having an IRA, and be well on your way to a comfortable retirement.