IRA NightmaresSubmitted by Financial Planning Solutions, LLC on July 6th, 2018
IRA's for those that know, stand for Individual Retirement Accounts.
Over the past 25 odd years, I've seen my fair share of mistakes one can make pertaining to these types of accounts.
I thought I'd share some of them with you to hopefully, keep you from possibly making one of these.
- Over contributing. "Individual" means just that. These accounts are designed for one person and one person only. Years ago, I met a couple that were making contributions each year into one IRA (in the husband's name) BUT for both of them. If memory serves, I think the maximum one could put in if eligible was $3,000 a year. They were contributing $6,000 (and quite proud they were maxing it out) for both of them. The penalties can be high for making excess contributions into these accounts so one must be careful.
- Not being eligible. Everyone can make a traditional IRA contribution if they are under 70 ½ and have earned income of at least what they are contributing. A retired woman called me that had been making contributions into her IRA even though she had no earned income. Earned income is money earned through working, not investment income which was her case.
- Not taking your required minimum distribution or RMD. If the IRA is your own (not inherited) then these RMD's must commence by April 1st after the year in which you turn 70 ½. Failure to do so causes a 50% tax penalty on the amount you were supposed to take but didn't. Ouch!
- Not understanding the rules surrounding inherited IRA's. One can inherit an IRA from a spouse or from a non-spouse. Different rules apply and I could write several pages on the nuances of non-spousal inherited IRA's but the main difference, is, if you inherit an IRA from your spouse, you may be able to defer taking those RMD's until you are 70 ½. With a non-spouse, you must begin the RMD's even if you are 5 years old. The same 50% penalty applies if you do not take your RMD from an inherited IRA.
- Taking money out of your IRA before 59 ½. Doing so will result in a 10% penalty as well as ordinary income taxes. I have had numerous people over the years tell me after the fact, that they took money out before 59 ½. There are a few instances where one can take money out before 59 ½ and avoid the 10% penalty. Here are the most used:
- Some expenses tied to non-reimbursed medical expenses
- First time home buyers can take up to $10,000
- Medical insurance premiums if out of work
- Paying back taxes to the IRS
- Division of IRA's pursuant to divorce. I've seen many mistakes here. Usually unintentional (but the IRS doesn't seem to care). Here's a pretty recent one I saw. Husband is required to give his wife 50% of his IRA pursuant to their divorce agreement. So, he requested 50% of the IRA balance and deposits the check into his bank account. He then writes a check to his wife. Seems reasonable. The IRA doesn't agree. They imposed taxes on the amount withdrawn as well as the 10% penalty as hubby was only 50. These division of IRA's must be done correctly.
- NOT contributing. An opposite mistake is not saving for retirement. Whether it's an IRA or other type of retirement account, it's important to contribute to help ensure a comfortable retirement.
P.S. You might be asking as you read this, doesn't the banks or investment firms know these rules and advise on them? Some good ones do but over the years (and just last week I heard from a woman that inherited an IRA from a MAJOR bank and they were clueless) I've seen some really bad advice from some of these institutions.
Bottom line, please reach out to use before taking any money out of your retirement accounts, regardless of your age.
We are here to help!
To good health!
All the best.
Rick Fingerman, CFP®, CDFA®, CCPS®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions,LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client.
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