8 Most Common IRA Mistakes

At year end 2004, the U. S. Retirement market had grown to $12.9 trillion. In the 10 year period from 1994 to 2004, mutual fund assets in retirement plans increased from $664 billion to $3,053 billion. Many investors make the same mistakes when it comes to their IRA accounts.

The following is a brief summary of the most common mistakes.

1. Not taking advantage of increased contribution limits. In 2002, IRA contribution limits increased for the first time in 20 years. The contribution limit in 2005 is $4,000. IRA owner’s age 50 or older can also make an additional $500 “catch-up” contribution. For 2006, the contribution limit remains at $4,000 but the “catch-up” contribution increases to $ 1,000.
   
2. Assuming a nonworking spouse cannot contribute. The truth is that separate “spousal” IRAs may be established for spouses with little or no income up to the same limits as the working spouse.
   
3. Not listing beneficiaries or not updating IRA beneficiaries. One of the most common mistakes made by IRA owners is either not listing a beneficiary, which may result in distribution of the IRA assets to the IRA owner’s estate, or not updating the beneficiary designations and coordinating them with other estate planning documents.
   
4. Paying unnecessary penalties on early (pre-age 59 ½) IRA distributions. As long as withdrawals are made in accordance with the requirements of Section 72(t) calling for “a series of substantially equal periodic payments,” there is no need to pay penalties on distributions from IRA’s before the owner is age 59 ½. Three calculation methods give IRA owners flexibility to take out the amount that is right for them.
   
5. Taking the wrong RMD. New rules regarding minimum distributions were finalized in 2002. Many investors may be taking too much out, but if they are not taking enough, they may be subject to a penalty tax of 50% of the amount not received as an RMD.
   
6. Placing the title of an IRA into a trust. Changing the actual ownership of the IRA to a trust causes immediate taxation. In addition, this same immediate taxation is incurred if the owner dies and the trust is named as the beneficiary.
   
7. Not taking advantage of the stretch distribution option or not establishing it property. The “Stretch IRA” is a way for nonspouse IRA beneficiaries to maximize payouts from the IRA over their entire life expectancy. Properly designating beneficiaries and informing them of the IRA owner’s “stretch” intentions are keys to making this strategy work.
   
8. Not rolling 40l(k)s at prior employers into IRAs. Any distribution from a 40l(k) requires a mandatory 20% withholding for income taxes. In addition to having significantly broader investment options, IRAs do no require any mandatory tax withholding for distributions. Failure to rollover a 40l(k) to an IRA also prevents beneficiaries from exercising the “stretch” option.

The legal and tax information contained herein is merely a summary of our understanding and interpretation of current tax laws as of July 1, 2005 and is not exhaustive. Nelson Investment Planning Services, Inc. offers securities through Nelson Ivest Brokerage Services, Inc., a member of NASD, MSRB and SIPC.