When it comes to planning for retirement, there is nothing that should be left to chance. Furthermore, there shouldn’t be any ambiguity within your retirement planning and the steps you have to take to ensure that you are navigating your retirement plan correctly. It is essential that when you look for an IRA custodian, you feel as though they have your best interest in mind, and are available to walk you through any questions you may have. What you don’t want to do is be penalized or fined for a plan that was originally designed to save you money in the long-run. 

Below, we will discuss the most common IRA mistakes that holders make, and how you can avoid them. One of the best things you can do to leverage your IRA account is using it in tandem with a non-recourse loan — which our loan providers are happy to set you up with — to invest in real estate and more. For any additional information about acquiring a non-recourse loan, don’t hesitate to reach out to one of our non-recourse loan lenders. We look forward to looking with you. 

Assuming You Can’t Have an IRA Because of Your Employer Plan

Many people make the assumption that because they already have a retirement plan at work that they are unable to have an IRA plan as well. In most cases, that isn’t true, but it does depend on certain income limits. An employer-sponsored retirement plan in addition to an IRA can provide you with a tremendous advantage, especially in the years leading up to retirement. Having both will provide you with tax-deductible contributions and tax deferral of investment earnings on both accounts. Not to mention, if you plan to retire early, having both plans is a necessity. 

 

Waiting Until the 11th Hour to Contribute

We think that this article by Morning Star said it best, “Those last-minute IRA contributions have less time to compound, and that can add up to some serious money missed out on over time.” For example, investors who waited until early 2021 to make their contributions would have missed out on an 18% return from the S&P 500 (a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States) and a nearly 8% gain on the Bloomberg Barclays Aggregate Index. 

For those IRA holders who don’t have the full contribution amount at the start of the year may want to consider initiating an auto-investment plan within their IRA’s, investing fixed installments per month until they hit the limit.

 

Not Making a Contribution Because it Isn’t Tax-Deductible

Even if your income exceeds the IRS limits to make tax-deductible IRA contributions, you can still make contributions, but they won’t be deductible. It is true that some people are not as interested in making an IRA contribution because it isn’t tax-deductible, but that is a mistake. Even if the contribution isn’t tax-deductible, investing your earnings in your IRA will still be tax-deferred, meaning that you could gain tens of thousands of dollars in tax-deferred gain. 

 

Not Naming or Updating IRA Beneficiaries

Not listing primary and contingent beneficiaries may result in the distribution of the IRA assets to the IRA owner’s estate, which results in an accelerated distribution and taxation of the funds. Failing to keep beneficiary designations current, and coordinating them with other estate planning documents can lead to conflicts and unintended results. This causes significant tax complications, as the IRA will be liquidated in a shorter period of time which can likely result in increased taxes due to the progressive tax structure of the tax system. 

Plus, you want to make sure that the beneficiaries listed on your IRA are updated, because, for example, an ex-spouse may still be listed as the recipient of the funds, which is not how you want things to go. 

 

Forgetting About Your RMD, or Taking Less Than Required

You must start taking distributions, called RMDs, or “required minimum distribution,” from virtually all retirement accounts (excluding Roth IRAs) upon reaching the ripe age of 72. This is also when you may have to pay tax on the distributions. There are two required distribution dates that you will need to meet in the next year: you must take the first distribution by April 1st that year and then take a second distribution by December 31st that same year. After the first year, you will only have one RMD per year, which will be added to your taxable income. 

If you do not take any distributions, or if the distributions are not large enough, the penalty is steep. You may have to pay a 50% excise tax on the amount not distributed as required.

 

Leaving the RMD Proceeds in Your Bank Account Rather Than Reinvesting Them

This works for those who are not in-need of RMDs and is less of a mistake and more of a missed opportunity. It is not unusual for couples with significant guaranteed income sources to take their RMDs and just leave the proceeds in their bank savings account thinking they can no longer invest these dollars. The thing is that you can, just not back into an IRA. If account holders with no desire to spend those dollars or give to charity, the option to reinvest the after-tax proceeds is possible. 

You could invest the proceeds into a taxable investment account, which could be a typical taxable account, like a joint, single registered, or trust account; or if you have family members that are planning on attending college or university, you could invest those proceeds into a college savings plan.  

 

Not Maximizing Your Contributions

Having an IRA is a long-term plan, meaning that in order to reap its benefits, you must handle it on a consistent basis. It is always going to be easy to talk yourself out of making the largest contribution that you are allowed, but the only person you are hurting is yourself. The IRA annual contribution limit cannot exceed $6,000 if you are under age 50, and must not exceed $7,000 if you are aged 50 and older.  

You should aim to hit these target maximum contribution limits year after year. If it helps, remember that the money you contribute to your IRA is tax-sheltered until you withdraw it from your account, so any earnings that you make within your IRA is not taxed. That is money in your pocket.

 

Not Taking Advantage of the Spousal IRA for a Non-Working Spouse

One of the most basic rules of IRAs is that they must be funded out of earned income. However, there is an exception for non-working spouses: the spousal IRA entitles a non-working spouse to make contributions to an IRA under virtually the same rules as a working spouse. As long as the working spouse is earning a sufficient amount of income to cover the contributions to both IRAs, the spousal IRA will be allowed. This allows a working/non-working couple to double their IRA contributions each year, and get tax deductions for doing so!   

There are several more important mistakes that we would like to cover so you can avoid them in the future, but we will have to cover those in another blog, so keep an eye out for it! But, in the meantime, we sure do hope this helped. If there were any questions left unanswered, we strongly advise that you reach out to your IRA custodian and ask for clarification. When you do firmly have a grasp on your self-directed, then contact the non-recourse loan lenders at First Western Federal Savings Bank to learn how you can leverage your self-directed IRA with your non-recourse loan. We look forward to working with you.