IRA’s, or Individual Retirement Accounts, are a common and widely used tool in retirement savings plans.  There are various types, from Roth’s to traditional IRA’s.  With so many choices, and all of the accompanying rules and regulations, there is plenty of room for mistakes.  Here are 8 common ones you’ll want to avoid:

1.       Not naming IRA beneficiaries. 

Not naming your IRA beneficiaries, or not keeping those beneficiaries up to date can result in tax consequences.  This can occur because of the distribution of the IRA assets to the estate of the IRA owner.  Not keeping beneficiaries current and in line with your other estate planning tools and documents can cause you big problems.

2.       Not taking advantage of increased contribution limits

The contribution limits for 2012 are $5,000, and $6,000 for those who are age 50 and older.  If IRA’s are your preferred retirement savings vehicle, you need to fully fund them to have a chance at a comfortable retirement.

3.       Missing important dates

You have 9 months to pay the taxes on an IRA you’ve inherited.  By September 30 of the year after the owner’s death to identify who’s life expectancy will determine the RMD’s for that IRA.  Also, Generally speaking, those distributions must begin by the end of that same year.  You don’t want to make the IRS mad, right?


4.       Placing an IRA in a trust

If you put your IRA in trust, or in other words, make a trust the owner of your IRA, you get to pay taxes, NOW!  Yep, immediate taxation, including a 10% penalty if the IRA owner is under age 59 ½.

5.       Not “stretching” your IRA

If the plan is to maximize a beneficiary’s payouts, you need to make sure they are aware of the opportunity to “stretch” that IRA.  Stretching and IRA allows properly designated beneficiaries to take payouts based on their life expectancy, allowing for additional growth and potentially lower taxes than withdrawing those funds in a lump sum.

6.       Not contributing for a nonworking spouse           

It is common that we make poor assumptions.  One of these is that IRA’s for those with little or no income can’t be done.  That’s not true.  IRA contribution limits for nonworking spouses are the same as for those who are working.  Again, if IRA’s are your preferred vehicle, you’ll probably want to contribute to both spouses’ IRA’s.  There are a few rules to follow, of course, so talk to your tax advisor before you start.

7.       Taking the wrong RMD (required minimum distribution)

Once you’re in your seventies, you have to withdraw at least a minimum percentage of your IRA.  If you don’t, excepting Roth IRA’s, you’ll get the added bonus of an income tax penalty of 50% of that amount that should have been withdrawn.  That’s pretty stiff, so don’t mess that up!

8.       Paying penalties on early IRA withdrawals

If you take a distribution from your IRA prior to age 59 ½ you can be charged a penalty for that distribution.  The exception to this rule is found in IRS Code Section 72(t).  This section allows “substantially equal periodic payments” to be withdrawn from the IRA without the penalty.  If you need to access some of your funds, talk to your tax advisor first.  They may be able to save you from that penalty with just the use of their pen, paper, and a calculator.  Almost superhuman, isn’t it?

I’ve been thinking a lot about taxes recently.  It could be that I’ve spent time with CPA’s lately, or that it’s year end and every business owner I know is trying to reallocate spending to reduce their tax burden,  or maybe it’s this really neat solar energy opportunity I’ve run across that is saving people thousands on this coming year’s taxes.  Nope, it’s none of those.  It’s because the federal argument committee, otherwise known as Congress, has been in the headlines again as they “move towards a standoff” on the payroll tax issue.

I thought “I wonder how high taxes will go?”  With national debt at an all-time high and setting new record markets daily, and a government that can’t figure out how to budget and control spending, I’m concerned it’s going to be bad.  The question is “How bad?”

Back in 1913, the top marginal tax rate was 7%.  I wish that were even a possibility, but our country is so out of control that that will never happen.  That’s as low as it has been.  Just for reference, in the mid 40’s the top marginal tax bracket was 94%.   No that’s not a typo.  94%.  Go ahead, look it up!   It should be noted that the way the rules were written, it was effectively limited to 90% of total “Net Income”.  But still, do you really want to give 90% of your dollar away?

I believe that the current tax situation has a lot to do with the baby boomer generation and their retirement, but I’ll save that rant for another day…

The real question is… What are you doing to protect your money from these kinds of taxes?