Costly Mistakes People Make With Their IRA Savings
- Making mistakes with your IRA accounts can be very costly.
- Choosing the right type of IRA can save thousands of dollars in taxes.
- Not investing properly in an IRA can prevent your account from growing as much as possible.
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Saving for retirement can be a delicate process.
While IRAs are a great tool for retirement savings, they also have a number of rules and regulations that can be quite difficult to understand. It can be easy to make mistakes that seriously affect the amount of savings you will have down the road.
However, there are a few simple mistakes to avoid. Here are the most common mistakes made with IRAs, along with tips on how to avoid them from a financial advisor and financial planner.
1. They’re not choosing the right type of IRA
Roth and traditional IRAs are vastly different, but there isn’t one option that’s right for everyone or every situation.
The big difference between the two types comes down to when you pay taxes: either now or when you retire. Roth IRAs have tax savings later where taxes are paid now and the money later comes out tax free. For those who have years to grow their contributions, a Roth IRA can result in big tax savings down the road. Traditional IRAs, however, are tax-exempt now, with taxes paid later in retirement.
“It’s not just what you earn by investing, it’s also what you keep,” said wealth manager and financial planner Alex Klingelhoeffer of Exencial Wealth Advisors. “You want to make sure that you not only have the right eggs in your basket, but also the right basket to transport your eggs.”
By choosing the right type, you will be able to better take advantage of the tax advantages offered by these accounts.
2. The money in the account is not invested correctly
No matter what type of IRA you save in, the money you contribute needs to be invested in order to grow. Money deposited in cash does not benefit growth and compound interest.
First, it must be invested. Former financial advisor and Building Bread founder Kevin Matthews said he once had a client who kept money in a retirement account for decades.
“It’s almost like putting food in the microwave, or putting food in the oven, and not turning it on,” he previously told Insider. You can invest the money in it, but you want to make sure that it is invested in the funds that are right for you to actually make the money grow. ”
When your money is invested, it must also be invested correctly. It needs to have the right level of risk for the time of your retirement, and that largely depends on how aggressively or how carefully that money is invested, Klingelhoeffer said.
“I’m going to see people who came to me in their thirties and they say, ‘Okay, I’m not afraid of risk. It’s good to base your investment on a personality, but that doesn’t give you growth you need over time to achieve most of your goals, ”said Klingelhoeffer.
By investing your money correctly, you can ensure that it not only grows, but increases by the amount that matches your goals.