Common IRA Mistakes and How to Avoid Them
Individual Retirement Accounts (IRAs) are unique, tax-advantaged accounts that present a great option for those looking to build their retirement nest egg. While an incredibly effective tool, even the most well-intentioned savers can make mistakes that can potentially reduce their long-term retirement savings potential.
Below are five of the most common IRA mistakes, according to Morningstar.
1. Not Getting Started Early
One of the biggest IRA mistakes is delaying getting your retirement savings started. Compound growth is a major contributing factor in the benefits offered by your IRA, making any delays largely consequential when you reach retirement age. Even if you cannot make the maximum annual contribution to your IRA, it is well worth placing what funds you can in your IRA each year to allow your retirement savings to continue to grow.
The earlier you begin contributing to an IRA, the more time your investments have to potentially grow. Small, consistent contributions can make a meaningful difference over several decades.
2. Not Maximizing Contributions
Many account holders contribute less than they are eligible to each year. While contributing something is better than nothing, making the full allowed contribution each year (if you are able) can make a huge difference when it comes time to retire.
Review current IRS contribution limits annually and increase your contributions whenever your budget allows. Setting up automatic transfers to your IRA can also be a great way to ensure you don’t miss any annual contributions.
3. Choosing the Wrong Type of IRA
Traditional IRAs and Roth IRAs offer different tax advantages, be sure to review each account type thoroughly to make sure you choose the account that best fits your situation.
- Traditional IRA: Contributions may be tax-deductible, and taxes are generally paid when funds are withdrawn in retirement.
- Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
When choosing an IRA, consider your current income, future tax expectations, and retirement goals. Our IRA team is always here if you have questions or would like to discuss which IRA offering best fits your situation.
4. Taking Early Withdrawals
An IRA is designed for retirement, not short-term spending or emergency savings. Withdrawing funds before you are eligible can trigger taxes, penalties, and lost long-term growth. Beyond the immediate financial consequences, early withdrawals reduce the money available to grow over time, potentially affecting your retirement readiness.
Build a separate emergency fund for unexpected expenses and emergencies. Keeping accessible savings outside of your retirement accounts can help prevent the need for early IRA withdrawal and help you avoid costly penalties, now and in the future.
5. Forgetting About Beneficiaries
Many people open an IRA and never revisit their beneficiary designations. Outdated beneficiaries can be problematic, so we recommend reviewing your beneficiaries annually and especially after major life events (e.g., marriage, divorce, death of a loved one, childbirth, etc.).
If your beneficiary is designated incorrectly, your assets may be distributed differently than you had intended.
Get Started Today with Your SouthStar Bank IRA Experts!
An IRA can play a crucial role in your retirement strategy, but avoiding common mistakes is just as important as opening the account itself. By starting early, maximizing contributions when possible, choosing the right IRA type, avoiding early withdrawals, and keeping beneficiary information up to date, you can make sure you get the most out of your IRA!
Ready to move forward with your retirement journey? Have questions about your existing IRA?
You can contact your SouthStar Bank IRA experts today at ira@southstarbank.com or 512.384.3948!
Frequently Asked Questions (FAQs)
What is the most common IRA mistake?
The most common mistake is waiting too long to start contributing. Delaying retirement savings reduces the time your investments have to benefit from compound growth.
Can I contribute to an IRA and a 401(k) at the same time?
Yes. Many individuals contribute to both an employer-sponsored retirement plan and an IRA, though certain tax benefits may depend on income levels and plan participation.
What happens if I withdraw money from my IRA early?
Early withdrawals may be subject to taxes and potential penalties, depending on your age and the circumstances of the withdrawal.
Is a Roth IRA better than a Traditional IRA?
Neither option is universally better. The right choice depends on your income, tax situation, and retirement goals.
How often should I review my IRA?
Review your IRA at least annually and after major life events such as marriage, divorce, retirement, or the birth of a child.
Can I change the beneficiary on my IRA?
Yes. Most financial institutions allow account owners to update beneficiary designations at any time.
