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5 Common Mistakes To Avoid And Maximize Your IRA

IRA

So many Americans have the bulk of their retirement money in IRAs.

Yet, so few people take the time to understand the full range of laws that apply to IRAs. The laws are many and complicated since they were created by the Internal Revenue Code. Not fully understanding and being in compliance with the rules and regulations can be surprising and wreak havoc on your retirement. Working with a team of professionals who understand all aspects of the rules applying to IRAs – instead of one who specializes in one aspect — is the way to go.

Most people understand one rule which is if you take your money out too soon significant penalties will be incurred. However, most people aren’t aware that the same applies if you take your money out too late. If you keep the following mistakes handy, hopefully you will be able to avoid making the same mistakes and losing the money you worked for so hard and for so many years.

Mistake #1: Trying To Minimize Income Taxes

The first mistake commonly made with IRAs is that people focus too much on trying to minimize income taxes now, and they don’t understand how their IRA is taxed, when and to whom. They get paralyzed with the thought of paying any income tax now but end up paying significantly more income tax later, which doesn’t meet their overall goals.

Mistake #2: Having To Pay Excise Taxes

The second common mistake is having to pay excise taxes in addition to income taxes. What are excise taxes? Essentially, they are slaps on the hand by the government. You will be penalized by the government and have to pay extra taxes (excise taxes) if you fail to follow all the government regulations most folks don’t know about.

Mistake #3: Not Considering How IRA Plays Into Long-term Care Costs

The third common mistake is not considering how IRAs play into the cost of long-term care. Most people can’t afford to pay for a nursing home if it’s needed and unfortunately, like taxes, they learn most of their information about how Medicaid works at the beauty shop and coffee shop. Is your IRA exempt in determining your eligibility for Medicaid or will the government take your IRA before Medicaid will pay for your nursing home? You have to be very clear on the answers to these questions.

Mistake #4: Subjecting IRA To Estate Taxes

The fourth most common mistake is subjecting your IRA to estate taxes. Those who have accumulated assets that would be subject to an estate tax may not know this, but they are subjecting an IRA to both income and estate taxes at death. Estate taxes are calculated on your total assets including your IRA and other qualified assets. Combined, these taxes can have an absolutely confiscatory impact on an IRA at death, which means your beneficiaries will end up with almost none of it, and the government almost all of it. To avoid this, you have to be really, really clear about how to make sure it never happens to you.

Mistake #5: Not Fully Protecting Your IRA When Leaving It To Heirs

The fifth common mistake is how you leave your IRA to the people you want to get it without “unprotecting” it. Most people work their whole lives, live within their means and manage to accumulate a few dollars in the hopes they’ll be able to leave whatever is left to their loved ones. Then their loved ones get it, and it might be lost to their creditors, predators or other unintended risks that most people don’t think of.

For more in-depth conversations about protecting your IRA or to discuss the option of an overall estate and retirement plan, contact our office.