by Angela K. Sugimura, M.B.A.
Planning and saving for retirement is one of the most important financial concerns an individual will be confronted with. If you’ve already established an Individual Retirement Account (IRA) to help you invest for retirement, you’re off to a great start.
Unfortunately, all too often, many investors overlook the basic fundamentals of retirement planning. Consider these common IRA planning mistakes that may prevent you from having the retirement you’ve envisioned:
Not maxing out contributions
When it comes to investing for retirement, it’s important to save as much as possible, as early as possible. The contribution limit for 2011 is $5,000; $6,000 for IRA owners age 50 or older.
Not keeping beneficiaries updated
Many IRA owners are unaware of how the selection of a beneficiary can affect distributions of their IRA assets after their death. Simply using a will to indicate who is to receive IRA assets is not enough; IRA beneficiary designations generally take precedence over designations made in a will. In cases in which no beneficiary is named, the IRA assets are generally turned over to the IRA owner’s estate, which could result in costly probate expenses and higher taxes paid by the IRA owner’s heirs.
Not taking the proper required minimum distribution
Required minimum distributions (RMDs) are the minimum amount that an IRA owner must withdraw from his or her account every year upon attainment of the required beginning date (RBD), which is April 1 of the year following the year in which the IRA owner turns age 70 ½. Those who do not take enough out each year may be subject to a federal income tax penalty of 50% of the amount that should have been taken as an RMD but was not. Consolidating retirement assets may make it easier to manage these distributions.
Not taking advantage of a Roth IRA
The Roth IRA presents a unique investment opportunity because of its tax-free advantages. With the Roth IRA, contributions are not deductible, but distributions — including earnings — can be withdrawn tax-free under certain conditions. Roth IRAs are also not subject to RMDs. There are income limits that affect eligibility for a Roth IRA, so be sure to talk this option over with your financial advisor.
While these mistakes can be costly, they can be avoided with proper planning. To address these or any other potential IRA planning issues, talk with your financial advisor, accountant, or attorney today.
Angela Sugimura is a Senior Vice President/Investments and Branch Manager with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange. She can be contacted in the firm’s Murrieta office at (951) 461-7220.