If you think about it, championships are won by the teams that make the fewest mistakes. It's usually not the good offense but the best defense that wins (the recent World Series was a good example). I think the same is true with managing your money: One of the best things you can do is avoid mistakes, like these seven IRA errors:
#1. Not taking advantage of increased contribution limits. The amount you can invest has gone up over the years. Depending upon your financial circumstances, it is likely a good idea to max out your IRA contributions.
#2. Forgetting that your non-working spouse can have an IRA. Both you and your spouse can have full-fledged IRAs if at least one of you is employed.
#3. Paying unnecessary penalties on withdrawals. If you take money out of an IRA before you’re 59, there are tax consequences: a 10 percent penalty plus income tax on the money you withdrew. There are some ways to get money out of an IRA prior to age 59 without being penalized, but make sure you know what they are before making a withdrawal.
#4. Listing your beneficiaries on your IRAs incorrectly. This is the Number 1 mistake I see. People get married. They get divorced. They have kids, or grandkids. I see them change their wills, but rarely do I see them update their IRA beneficiary designations. Don’t make that mistake.
#5. Making a trust the beneficiary of your IRA. You're got to be careful. If you set up a trust incorrectly, the IRA will go into the trust upon your death but then becomes taxable. You’ve just inadvertently handed 40 percent of the value of your IRA to the IRS, which is probably not what you intended.
#6. Not taking advantage of stretch IRA provisions. If you inherit an IRA, you have to take the decedent's required minimum distribution before December 31st of the year following the year of the decedent’s death. If you don't, it comes due and you lose the ability to stretch the IRA over your lifetime, and losing that ability also means you lose some of the associated beneficial tax results. I suggest that anyone inheriting an IRA speak to a financial professional.
#7. Taking the wrong minimum distribution after age 70. When you turn 70, you have to take required minimum distributions. If you withdraw the wrong amount, the IRS fines you 50 percent of the amount you should have taken out, and then you pay tax on that fine. For example, if you were supposed to take out $10,000 but you only withdrew $5,000, you’d pay $2,500. That $2,500 is in addition to your normal tax brackets, so you could potentially pay another $1,000, for a total of $3,500 in taxes and penalties on the $5,000 you should have withdrawn. This is clearly an important mistake to avoid.