Using a traditional individual retirement account (IRA) to build your nest egg is an optimal choice for many taxpayers. Just make sure you don't make any of these common IRA mistakes:
Adding the wrong type of investment to your IRA. Don't put tax-free investments, such as municipal bonds, in an IRA. You may end up paying ordinary income tax on money that wouldn't have been taxed, or you'll sacrifice earnings for a tax benefit you'll never receive.
Going over the yearly contribution limit. You can contribute up to $5,500 in 2018. And if you're 50 or older, you can contribute an extra $1,000 catch-up contribution to your IRA each year.
Not naming an IRA beneficiary. By leaving the beneficiary form blank, your heirs may miss out on valuable growth potential, and speed up income taxes on distributions. The longer the money stays in an IRA, the longer it grows tax-free.
Making early withdrawals. You'll pay regular income tax, as well as a 10 percent penalty on early withdrawals from your IRA unless an exception applies. Early withdrawals are those you take when you're younger than 59 1/2.
Forgetting to take your required minimum distribution (RMD). You are required to take distributions from your IRA when you reach 70 1/2. You have until April 1 of the year after you turn 70 1/2 to begin withdrawals. The penalty for withdrawing less than the required amount is 50 percent of the shortage.
IRA mistakes can be costly. If you'd like help with your IRA tax issues, give us a call.