Most investors overlook savings opportunities, don’t take advantage of the options available, or make serious mistakes when it comes to their IRAs (individual retirement accounts). While every person’s situation is unique, some missteps are very similar. Taking a few minutes to understand some of the most common blunders is the best way to keep a person’s nest egg on the good side of the IRS rules.
Keep in mind, though, before making a move, it’s a good idea to get advice from tax professionals or accounting pros. Being informed will ensure a secure financial future.
- Eligibility Mishaps
Regardless of if you inherited an IRA or are planning this financial vehicle alone, one of the biggest issues that occur results in eligibility mishaps. Statistics show that only about 11 percent of all households in the U.S. contributed to either a Roth or traditional IRA in 2017. While a person’s savings habits may be a familiar reason for this low funding, another common reason is that people mistakenly believe they aren’t eligible to contribute to a Roth or a traditional IRA.
Instead, it’s important to note that virtually everyone can fund traditional IRAs as long as they have reportable compensation and they have not reached the age of 70.5. Keep in mind, though, the age limitation doesn’t apply to the eligibility for Roth IRAs, but the person’s income has to meet the income threshold that is established by the IRS.
- Reporting/Tracking IRA Basis
If a person isn’t aware of how much after-tax money they have accumulated in their IRA, the account holder may wind up facing an unexpected and unwelcome surprise -; the distributions might be completely taxable. Generally speaking, with the huge selection of scenarios, IRA custodians don’t always track the IRA basis, which are the funds found in an IRAthat wase already taxed either as a nondeductible IRA contribution or as after-tax funds that are rolled over from other plans.
If an individual finds themselves in this situation, they need to file the Form 8606 from the IRS -; Nondeductible IRAs along with their tax returns that support and report their nondeductible contributions. It’s also necessary to file Form 8606 to reconcile their future distributions and to receive the appropriate income credit when going out.
- Required Minimum IRA Distribution
Some investors aren’t aware that the year they reach the age of 70.5, all of their IRAs -; SIMPLE, SAR-SEP, SEP, and traditional -; have to be aggregated to figure out the amount that has to be withdrawn to satisfy the RMD (required minimum distribution) each year.
The required beginning date for an RMD is typically April 1st of the year after the account owner or plan participant reaches the age of 70.5; however, there’s an exception that might apply if a person keeps working (is still working) for the employer that is sponsoring the 401(k) plan. This exception is only available if it is allowed by the plan and the individual doesn’t own over five percent of the company.
Avoid the Mistakes Found Here
To ensure that the most common mistakes aren’t made, review the information here. Doing so will pay off in the long run. Being informed is the best way to ensure that a person’s IRA meets all the needs of their financial situation now and in the future and that no serious issues occur.