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Try to Avoid These Stupid IRA Mistakes
Fortunately, December 31st is not the final decision date for what
we do with our individual retirement accounts the final 2007
IRA contribution deadline comes on April 15th next year
but it's
a good time to review the do's and don'ts of successful IRA
management.
Mistake # 1 Failure to start. Do you have either a
traditional or Roth IRA as part of your retirement strategy? If
not, get some advice a Certified Financial Planner
professional is a good start to review your overall retirement
options and give you some ideas where to start.
Mistake # 2 Not comparing the advantages of
traditional IRAs and Roth IRAs. The biggest differences
between a traditional IRA and a Roth is the way Uncle Sam treats
taxes on both types of IRA investments. If you put money in a
traditional IRA, you'll be able to deduct that contribution on
your income taxes. In a Roth, you don't receive the tax
deduction for those contributions, but when it's time to take
the money out, you won't have to pay taxes on it.
Mistake # 3 Forgetting income limits for a Roth IRA.
The income limits for establishing a Roth are as follows: for a
married couple filing jointly or a qualified surviving spouse,
you can't contribute if your modified adjusted gross income
exceeds $166,000; if you're filing single, you can't contribute
if your modified AGI exceeds $114,000, and for married people
filing separately, you can't contribute if your modified AGI
exceeds $10,000. If you exceed those income limits and make a
deposit, you might be subject to a penalty.
Mistake # 4 Failing to make sure your beneficiaries
are correct. Starting in 2007, a direct transfer from a
deceased employee's IRA, qualified pension, profit-sharing or
stock bonus plan, annuity plan, tax-sheltered annuity, 403(b)
plan or a governmental deferred compensation plan to any
qualified IRA can be treated as an eligible rollover
distribution if the beneficiary is not the deceased's spouse.
That means your kids or any other designated recipient can
inherit your IRAs without negative tax consequences at that
time. Non-spouse beneficiaries need to check with a tax expert
when they must begin distributions from an inherited IRA. Of
course, no matter what the investment, make sure your
beneficiaries are always current.
Mistake # 5 Not knowing the maximum contribution.
For both traditional and Roth IRAs, the maximum annual
contribution for 2007 is $4,000 unless you are age 50 or older,
when you can add an additional $1,000 to that total. But review
the income limits for contributions as you go.
Mistake # 6 Frittering away your tax refund. Did
you know you could deposit your tax refund directly into your
IRA? It works for a health or education savings account as well.
While many people use their tax refund as a bonus to buy a treat
or pay off bills, consider filing your taxes a bit early and
arrange to e-file a direct deposit to your IRA so you can note
that deposit for the 2007 tax year by next April 15.
Mistake # 7 Forgetting retirement savings benefits for
active military personnel. The 2006 Heroes Earned Retirement
Opportunities (HERO) Act allows active military personnel and
their families to put a potentially greater contribution toward
their traditional or Roth IRA accounts. The act allows tax-free
combat pay to be considered as earned income to determine the
contribution amount for traditional and Roth IRAs it hadn't
before. Before, a military person who earned only combat pay
wasn't allowed to contribute to either form of IRA. This change
is retroactive to 2004 and affected military personnel have
until May 28, 2009 to make their contribution, though amended
returns may be filed.
Mistake # 8 Withdrawing money early from an IRA or
blowing a rollover. Money taken out of an IRA is subject to
income taxes and a penalty if you are under 59 ½ years old and
do not put it back into an IRA within 60 days. When moving
assets, most of the time a trustee-to-trustee transfer can be
more efficient and with less margin for error. If the IRA
distribution check is made payable to you, there is a greater
chance you'll miss the 60-day deadline and you'll face taxes and
penalties.
December 2007 This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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