An individual retirement account or IRA is a savings account that allows you to invest money with tax advantages for your retirement. Compared to a 401k, this type of retirement account can be opened without an employer’s involvement.
While it may be easy to set up an IRA, managing it for long-term benefits is another story. There are various factors to consider in handling your retirement savings, so it’s not impossible to make a mistake. To prevent any slip-ups, here’s what to avoid:
Not Funding the Right Type of IRA
There are many types of investment retirement accounts with varying rules on tax advantages. So, it’s crucial you understand and fund the IRA type that is most beneficial for your situation.
For instance, a traditional IRA allows you to make contributions pre-tax, with tax deductions based on your income only made upon your withdrawal. On the other hand, in a Roth IRA, you contribute after-tax dollars and make tax-free withdrawals once you reach the qualifying age. If you are unsure which one to get, consult an expert.
Exceeding Contribution Limits
Besides ensuring consistent contributions to your IRA, it’s crucial to take note of the annual contribution limit. For a traditional or Roth account, you can only contribute a total of $6,000 per year. But, if you are aged 50 and above, you are eligible for catch-up contributions amounting to $1,000 per year, giving you a total annual contribution limit of $7,000.
Exceeding the IRA contribution limit results in a 6% penalty. So, always track down your contributions to prevent going over the limit. If you made the mistake of contributing too much, simply take out the excess amount before filing your taxes.
Not Updating Your Beneficiaries
Your beneficiary is the one who inherits the assets of your retirement savings account. So, it’s crucial that they are named and updated as much as possible. Besides ensuring that the person you appointed will inherit your assets, updating your beneficiaries will also prevent any issues for your family upon your passing.
Talk to a Reliable Financial Advisor
Learning about some common IRA mistakes to avoid will help you better manage your retirement savings. Still, if you run into anything unfamiliar or want professional advice on your taxes, reach out to a financial advisor. Contact us at LoneStar Wealth Management in Lubbock, TX for tax planning services and more.