Estate Planning

How to Avoid Common IRA Mistakes

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To help you sidestep some of the most common blunders and get the most out of your IRA investments, Kiplinger’s recent article entitled “Don’t Make These Common IRA Mistakes” points out the most common blunders and how to avoid them.

Not Planning for the “Second Half.” It’s about two halves. You accumulate wealth in the first half and withdraw it in the second. Many people only play the first half of the game: they focus only on saving as much as possible in their IRA. However, with retirement savings, it’s not how much you have. It’s how much you can keep after taxes.

Converting to a Roth All at Once. If you think your tax rate will be higher when you retire than it is, converting a traditional IRA to a Roth IRA this year might be a wise choice. Ultimately, taking that step may lower the total tax you owe on those funds. However, a Roth conversion has a tax bill on your next return. The “mistake” those people sometimes make is thinking they must convert the entire account simultaneously. Instead, you can do partial conversions.

Exceeding Roth IRA Income Limits. There are annual contribution limits for both traditional IRAs and Roth IRAs. However, for Roth IRAs only, there are also income limits. If you’re single, the amount you can contribute to a Roth IRA in 2022 is gradually reduced to zero if your modified adjusted gross income is between $129,000 and $144,000 ($204,000 to $214,000 for joint filers).

Doing Indirect Rollovers. Many people have trouble when they attempt to move money from one retirement account to another. If you take money out of an IRA and the check is in your name, you only have 60 days to roll that money over into another retirement account before the withdrawn funds are deemed taxable income. This is an indirect rollover. For IRA-to-IRA transfers, you can only do one indirect rollover per year.

Forgetting to Account for All RMDs.  The amount of your RMD is calculated by dividing the value of your Traditional IRA by a life expectancy factor as determined by the IRS.   You must take your required minimum distributions (RMDs) when you reach 73  (those born in 1951).  Your first RMD must be taken by April 1 of the year after you turn 73.  Account owners who turned 72 in 2022 must continue to distribute 2022 RMD no later than April 1, 2023.  Some people miss an RMD or don’t take it for all their accounts subject to the RMD rules. Other people miscalculate and don’t withdraw enough money. These can be costly mistakes because you could be penalized for violating the RMD rules.

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