For Mark Roberts’ Use:
It’s a common misconception that contributing to an IRA (Individual Retirement Account) is a simple task that should only take a matter of minutes. Yes, investing with an IRA is an excellent choice for many reasons, but if you rush your decisions you could make some costly errors. Watch out for the following 6 common IRA mistakes:
Roth versus Traditional? It’s common to see this decision as an either/or dilemma, but the truth is that you can do both! For example, you might at some point exceed the income limits to claim tax deductible contributions to a Traditional IRA. At this point you can switch over to funding a Roth IRA. It’s also difficult to predict your income in retirement, so holding diversified accounts can protect you from certain tax situations.
Backdoor IRA contributions are always tax-free? Don’t make this common assumption! This is often the case, but not always. A backdoor conversion might not be a good idea if you hold other IRA assets that have yet to be taxed.
Failing to convert to a Roth IRA. It’s easy to become complacent in retirement planning, and many people simply open a Traditional IRA and leave their money there for thirty years. It’s important to regularly review your investing decisions with your financial advisor, to be sure your money is in the best place. There are many situations in which converting to a Roth IRA is the better choice, but you have to be on top of the situation and make this move in a timely manner.
Accepting a mistake without questioning it. The rules governing IRA contributions and taxes are an absolute maze, and difficult for many people to understand. Fortunately, this also means there are plenty of loopholes for various situations. For example, you might make an IRA contribution that turns out to be a mistake in the long run. Rather than accepting your fate, check into recharacterization. This is basically an escape route that allows you to switch to the IRA wrapper you should have chosen initially.
Failing to contribute as you get older. Close to retirement, you might figure your contributions won’t matter as much because they don’t have time for the interest to compound. But remember that your retirement might last 20 years or more. That’s a lot of time for your money to continue to grow.
Making IRA contributions too late in the year. If you still need to make IRA contributions that will count for the 2013 tax year, your clock is ticking: You have until the tax filing deadline on April 15. While it’s still better to go ahead and do this, remember to make your contributions earlier in the year next time. Otherwise you miss a year of compounding interest.
Always discuss these IRA issues with your tax professional or financial advisor. Since the rules are complex and often confusing, decisions should be made carefully in order to make the most of your money.