1. Lacking foresight to plan for your retirement is the simplest way to limit your savings. Not contributing each time that you have the opportunity to is essentially downgrading your quality of life after retirement. While savings and interest are both valuably intertwined, the bulk of your money is realistically going to come from your contributions. This mistake, stifling your savings potential, can be made in three ways:
- Not contributing annually
- Not maxing contributions annually
- Waiting until the deadline each year (losing 15 months of interest annually)
2. Not updating your investments by risk in accordance to your age/plans. Imagine you have someone with 40+ years before retirement vs. someone who has 10 years before retirement. The two investment plans are going to look very different. Allowing yourself to invest in stocks with high risk often times yield a greater return over time; however, a high risk investment becomes less and less attractive as the investor grows closer to their retirement age. No need to be daring with only a few years left before you head off to Hawaii.
3. Not having proper asset allocation. Not all asset locations are created equal! To maximize your savings and investments it is important to research the best locations for your assets. The tax regulations are subtle, complex, and critical. Putting your money in the right places will minimize your taxes and stimulate the most growth.
4. Selling when you account is down. Don’t do this. The market is constantly fluctuating, more so than you realize. A drop in the market always seems like a big deal because that’s when people begin to panic. People become fearful and react in accordance to their emotions. One way you can protect your IRA is to remind yourself of the bigger picture. We all know the market is constantly changing, so its best to stay ahead of the hype. You wouldn’t run from the store if there was a sale.
5. Contributing too much. On the opposite end of the spectrum you can similarly hinder your savings by contributing too much. This will result in a high penalty based off of the excess amount deposited each year. Staying organized will help you avoid these senseless mistakes:
- Forgetting you already made a contribution for the year
- Contributing after the age 70 ½
- Contributing more than your taxable income
- Contributing on behalf of a deceased spouse
6. Rollover Mistakes are a common occurrence when dealing with IRAs. Transferring money from a 401k to an IRA should be simple enough; however, it could possibly trigger a tax bill.
- Keep in mind the 60-day rule
- One rollover a year from IRA to another IRA
- Rollovers from IRA to another IRA must consist of the same property
- If you’re over 70 ½ you can’t rollover your annual RMD
7. Taking out Loans. You can take out loans from your IRA, but don’t. Here is why: there’s a risk of fees and more importantly losing sight of the end goal. But if you must, then know the stipulations. If you fail to repay the loan within 60 calendar days, you’re going to get hit with a fee. Furthermore, any money removed from your IRA is considered a distribution. Really what it comes down to is that taking loans from your IRA isn’t a good choice. Don’t adopt a short term perspective when your IRA is really a long term investment. Keep your eye on the prize.
8. Failing to fill out beneficiary forms. While this wont effect you directly, it will certainly effect your beneficiary. Even if the IRA has been specifically given to someone in your will, a lot can still go awry. The account transfer can easily be mismanaged, and the beneficiary can lose tax benefits. While the forms may seem tedious- they are easier and provide more assurance than an extensive estate-plan. Think about a contingent beneficiary too. What if something not only happens to you, but to your spouse (or whoever is to inherit your IRA)? Have a few backup plans.