As you consider your financial plan for retirement, a Roth IRA probably enters into the conversation at some point. This is a valuable savings vehicle that can benefit most people in the long run. It is a way to keep your investments away from costly taxes related to capital gains and dividends. You will then be able to take your funds out when you retire, all without paying any tax. This sounds so great that you are probably ready to pump as much money as you can into such a deal. Not so fast, as there are some rules that you need to follow in order to take full advantage of this savings vehicle. Here are a few mistakes that you cannot afford to make as you invest in a Roth IRA.
Do Not Contribute Too Much
As mentioned before, the tax benefits of contributing to a Roth IRA are so great that you might want to consider putting quite a bit of your savings into it. However, your contributions do have a limit. Go over them, and you really are not doing yourself any good. Currently, individuals who are under the age of 50 and still working are often able to put $6,000 each year into a Roth IRA. Those numbers increase to a maximum of $7,000 for individuals over the age of 50. There are also income limitations that you need to follow. If you are single and earn more than $122,000, the amount that you can contribute actually decreases until you earn $137,000 and you cannot contribute at all. If you are married and filing jointly, those figures increase to $193,000 and $203,000 respectively.
You might be wondering what would actually happen if you contributed too much to your Roth IRA in any given year. Well, doing so would result in your having made an intelligible excess contribution. This will typically result in some type of tax penalty. You will actually owe 6 percent of the amount that you contributed over that which you were eligible for. You would end up having to pay this penalty when you go to file your taxes. The most common cause of over contributing is when your income increases, so keep that in mind and make adjustments as necessary.
Do Not Pull Your Money Out Early
It is also important to remember that this investment is for your retirement, so the government is not wanting you to pull any of it out until that time. You are getting tax breaks now and in the future in order to provide you with an incentive to save, but the penalties can be severe if you were to pull that money out of the account before it was time. With the Roth IRA, you are not permitted to make withdrawals until you are 59 1/2 years of age. If you take any of the money out before then, you will need to pay a 10 percent penalty on the withdrawal, but income tax on any of the accused earnings from the withdrawal. If you withdraw any of the money beyond that which you contributed, it would be considered as income and taxed accordingly. To be fair, there are a few exceptions to this rule. You will want to consult a tax professional if you want to see if your particular situation qualifies.
Do Not Forget to List Both a Primary and Secondary Beneficiary
There is some paperwork that you will need to fill out when you open a Roth IRA. Be sure that you look over everything carefully and fill in all of the forms. You will be asked to name a primary and secondary beneficiary. Don’t forget to do that, and update these individuals or organizations when necessary. If you neglect to do this, your heirs may find it extremely difficult and frustrating to get the money out. Do not leave everything you have worked so hard for in life in the hands of the IRS in the end.
These three mistakes need to be avoided. There are others, but these are the main ones when it comes to a Roth IRA. It is important to take advantage of this valuable retirement savings plan, but you do not want to lose money while doing it. Avoiding these three mistakes will help you to maximize the savings potential that is built into the Roth IRA.