5 IRA Mistakes That Could Cost You Big

A big red button with the word Oops to press and get customer support or service or to fix or correct an error, mistake, problem or gaffe you have made

Most investors are not thinking of IRAs now that tax season is over. So now is a good time to discuss some of the most common, and horrible mistakes investors sometimes make with their IRAs.

Since 2008, investors have been yanking money out of their IRAs early. This can be very expensive for a variety of reasons. Some of them are desperate, some are just frustrated with the markets performance. These decisions can have some very bad consequences long-term. Let’s take a look at the 5 “Big Ones”.

1. Rollovers
A rollover takes place when you move money from one custodian to another. That could include moving from a 401(k) to an IRA. The mistake occurs when you take the funds yourself in the form of a check. The rule says you must deposit these funds into an IRA within 60 days. If you don’t, it’s treated as a rollover, therefore, taxes and penalties may apply. Have the funds sent directly to the new custodian. You avoid handling the funds altogether.

2. Withdrawals for Education
I manage 401(k) plan assets. I often see people taking withdrawals from these accounts to help pay for their kids college bills. A penalty free exception applies to IRAs for college expenses. You can use funds to pay for college penalty-free, so move the money from 401(k) to the IRA, then take the distribution.

3. Taxes on Withdrawal
Whether you are pulling money out one time or for everyday expenses, make sure you have the taxes to pay on the withdrawals. At 70 1/2 you are required to withdraw from an IRA. Either set aside some of your money to pay the taxes, or have it withheld when you get the funds. Either way you won’t get surprised come April.

4. Avoid Mandatory Withholding
When you do a rollover from your company retirement plan, and not to another custodian, the employer is required to withhold 20% for taxes. This is the one that really makes me scratch my head. Taxes you can get back the next year when you file, if you can prove you did a rollover. Just have the employer send the funds to the new custodian…problem solved.

5. The 59 1/2 Rule
Some investors think that in the year they turn 59 1/2 they can take withdrawals without the penalty. You must be 59 1/2, so count 183 from your last birthday before you take that withdrawal.

Costly mistakes, but easily avoidable too. We are facing the potential of a big tax increase in the coming year or so. Why make the situation even more expensive by not being informed? Could this be a good time to pay taxes on a Roth Conversion? I can assess your situation, but you have to write to me at  david@lexwealth.com, or call me at (859) 225-2596.