Individual retirement accounts (IRAs) are great vehicles for investing in retirement. However, as with anything the government creates, they don’t always make it easy to navigate the ins and outs of the product.
If you currently have an IRA, or are thinking about starting to invest in an IRA, make sure that you don’t do these things!
1. The Beneficiary Mistake
When you open an IRA, you usually name a beneficiary. This is the person who will inherit the IRA upon your death. If you are just opening an IRA and you are young, you may skip this step. Don’t! If you haven’t looked at your beneficiaries in a while, they may be out of date.
Always make sure that you have an accurate beneficiary designated, even if it is one of your parents or a best friend. Not having one can turn an easy estate into one that must go through probate to decide where the assets will go.
Also, never name a trust or other entity the beneficiary of an IRA. If you do, it will automatically lose all the benefits of being in an IRA (tax deferral, etc.).
2. The Tax Deferral Mistake
One of the best aspects of an IRA is the tax deferral that is incorporated into the vehicle. You may be wondering why this is a problem. It can become a problem if you have the wrong investments inside an IRA.
You want to avoid investments that are already tax-deferred, such as municipal bonds or insurance products. Having these in an IRA really negates the purpose of having a tax-deferred vehicle. These products should be held outside an IRA, while investments in an IRA should take advantage of the tax-deferred nature of the account.
3. The Bank Mistake
Another big mistake that a lot of investors make is holding their IRAs at a bank. Many banks try to “sell” IRAs to their customers as a way to build loyalty.
However, banks, by their nature, do not allow the diversity of investments that holding an IRA at a brokerage would allow. In fact, many banks only offer structured products and loaded mutual funds to be held in IRAs.
Some banks do have separate brokerages which they are affiliated with. For example, Wells Fargo bank is affiliated with Wells Fargo Advisors. In this case, your IRA would be held with the brokerage, and you would have access to all investment products.
4. The Fee Mistake
When starting an IRA, it is important to start it at a discount brokerage that doesn’t charge fees for the account, and offers a broad range of free and no-load funds. You can find my favorite cheap investing sites here.
If you currently have an IRA and pay fees or are not happy with your selection of investments, it is very simple to move over to a new brokerage. It takes maybe five minutes of paperwork, and your account can be moved in about seven days.
5. The Not-Having-an-IRA Mistake
Perhaps the worst mistake you can make is not taking advantage of an IRA or Roth IRA altogether. Maybe you have been waiting. Maybe the current market has left you unsettled and you don’t want to start something new.
It is important to remember that an IRA is just a vehicle. Within it, you can invest in all kinds of financial products. If you don’t want to invest in stocks currently, you can invest in CDs or bonds. The same rules apply in that all your income generated from these products is tax-deferred.
If you qualify for a Roth IRA, definitely do not pass up the opportunity. This account differs in that you use after-tax money to fund it, but everything you withdraw after age 59 1/2 is tax-free!
Don’t be caught making these simple IRA mistakes and save some money!
Readers, what other common investing mistakes do people make with their IRAs?