12 Mistakes to Avoid Making With Your IRA

Mistakes to Avoid with IRA

Individual Retirement Accounts (IRAs) are critical in securing financial independence in retirement. Because of this, Brian and Bo took the opportunity to discuss what mistakes they see clients make — and how you can avoid them. This episode was inspired by an article published by Morningstar back in February called 20 IRA Mistakes to Avoid.

These mistakes are also applicable to other retirement plans as well! If you’re contributing to a 401(k) or 403(b), you’ll want to listen in and understand the 12 mistakes the Money Guys say you must avoid making.

Here’s a quick rundown of the errors Brian and Bo cover in this podcast:

Procrastinating on Making Contributions

The Morningstar article cites the fact that if you’re investing later rather than sooner, you could be losing out on growth thanks to compound interest.

Many people also think they can take their time if they’re getting an extension on their taxes. That doesn’t apply to traditional and Roth IRAs — those contributions need to be in by April 15th.

Not Understanding Tax Bracket Implications

Do you understand the retirement account options you have and the impact each can have on your taxable income? Brian and Bo explain when you should invest in a Roth IRA over a traditional IRA, and which retirement vehicles you should prioritize.

Not Understanding Roth Conversions

If you’re looking to retire early, you’ll be able to plan your tax strategy in advance. Once you retire, you don’t have any earned income, and converting to a Roth IRA might prove to be a good decision as there are no required minimum distributions.

Being Retirement Rich and Liquidity Poor

Having a 7-figure portfolio and nothing in reserves won’t do you any good in the present should something go wrong. Plus, if you retire early and can’t start withdrawing until you’re 59 ½ years old, you’ll need money to tide you over.

Ignoring Spousal Contributions

If you or your spouse work while the other doesn’t, you can still take advantage of spousal contributions. The non-working spouse can use the other spouse’s earned income to make contributions for themselves.

Buying an Annuity

Purchasing an annuity within a retirement plan is usually a bad idea as you’re doubling up on tax shelters. Make sure buying an annuity actually makes sense for your situation.

Treating Your IRA as a Piggy Bank

Say you do leave your job – that technically means you have a distributable event. That doesn’t mean you should make the most of it and buy a new pool or TV. Ignore the temptation to withdraw funds and roll your money over.

Not Updating Beneficiary Designations

Have you divorced or remarried? Then you should update your beneficiary designations – you wouldn’t want your ex-spouse inheriting your money, would you?

Want to grab more tips and understand the mistakes you need to avoid with your IRA? Be sure to tune in to this episode of The Money Guy Show for advice on how to better manage your IRA!

The Serious Impact of Investment Fees

InvestmentFees

Investing is a major part of building wealth and creating a nest egg that can work for you in the long-term. Unlike savings accounts, investing can result in remarkable returns on investment and can help beat the cost of inflation.

Investing is a key component to building wealth and paving your financial future. But there’s a not-so-hidden aspect that can slowly eat away at a nest egg if you’re not careful to guard against it: outrageously high investment fees.

The Serious Cost of Investment Fees

Investment fees may seem innocuous at first. But  they become more detrimental over time. Ignoring costs is a huge mistake.

Some of the worst fees appear in employer-sponsored 401(k) plans, and most people don’t even know how much the plan is costing them each year. Many employers are in the same boat, and simply don’t know the costs associated with the plans they’ve chosen for their employees.

Investors trying to go it alone may also end up paying more than if they had hired a trusted advisor working in their best interest, if they don’t understand how to evaluate funds or if they don’t know to pay attention to things like turnover in management, mutual fund fee structures, and other factors that can increase their expenses.

It doesn’t have to be this way. You need to learn how to manage those fees so you can maximize your returns.

How to Minimize the Impact of Investment Fees

Many people choose to invest their money because of the magic of compound interest, failing to realize that investment fees compound too. How can you avoid the pitfalls of investment fees as an investor and hold on to as much money as possible?

Be financially smart and choose low-cost options and do your due diligence when choosing a professional to help you manage your investments.

You’ll want to choose wisely when it comes to who manages your money too. Some financial advisors may take a large commission, which will eat away at your earnings. Choose a financial advisor who works as a fee-only planner and upholds a fiduciary standard.

Also, don’t forget to speak up! If you have an advisor or an employer that manages your 401(k), ask them about what investment fees you will be paying. Ask about any expense ratios, internal fees, commission fees, annual fees, trading fees and administrative costs that might cut into your investments.

You have a right to know and are entitled to that information, but you have to do your due diligence and ask. If your advisor isn’t transparent about fees and how they’re compensated, it’s time to find a new one.

And before investing in anything, think about rates, commission fees, managements fees, trading fees, and so on. Consider the long-term implications of how it will affect your portfolio.

If you’re in a position to make decisions around your company’s retirement plan options, you can do the following to potentially save thousands of dollars in fees for the employees of the business:

  • Establish a prudent process for selecting investment alternatives and service providers
  • Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.
  • Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices

As an investor, empower yourself with information and do your research on any investment fees before funneling more money into any assets or funds. After all, it’s your hard earned money that you worked for — don’t you want to keep most of it?