I’m a Financial Advisor: People Always Regret Doing These 5 Things With Their Roth IRA
Written by
Chris Adam
Edited by
Rebekah Evans
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A Roth IRA can be a valuable financial tool for many people. However, there are some rules and guidelines to keep in mind to make sure you’re not making mistakes with this tool.
Withdrawing Too Early
Roth IRAs have a five-year rule for the initial account opening and funding. If withdrawn early and this rule is not satisfied, a tax penalty will be assessed to the earnings withdrawn, according to Brandon Gregg, certified financial planner (CFP) and financial advisor with BBK Wealth Management.
Not Ensuring the Roth Makes Sense for Your Specific Financial Situation
“There’s no denying that the tax free growth and distributions of Roth money is a huge benefit and many make the decision to invest solely based on that reason,” Gregg said. “However, depending on a person’s tax situation, it may be important to also focus on saving taxes now.”
Pre-tax retirement account contributions lower taxable income, thus helping to save money for the current tax year. This doesn’t mean a person doesn’t save in their Roth at all, Gregg said, but all options should be weighed and balanced out to provide for tax savings now and in the future.
Not Taking Advantage of a Spousal IRA Contribution
There are contribution limits based on earned income with Roth IRAs. However, even if a spouse has no earned income, a spousal contribution can be made on behalf of the spouse that is earning income for the year, Gregg said.
Not Investing the Funds Correctly
Gregg said to take advantage of the tax-free growth.
“Work with an advisor to make sure that the funds are invested to maximize growth,” he said. “Of course, this should still fit within your plan and your current risk tolerance and objectives, but you don’t want to leave tax free money on the table over the long term.”
Not Documenting Roth Conversion Correctly
Converting funds from traditional IRAs to a Roth IRA can be a powerful tool to get the tax benefits of after-tax/Roth money, per Gregg.
“Be careful to document these conversions correctly, especially on the necessary tax forms the year you do the conversion,” he said. “It can be a nightmare long term if conversions are not properly documented.”
If you’re wondering about a good next step to take, Chad D. Cummings with Cummings & Cummings Law said it may be helpful to conduct a Roth audit before the end of the year. You can verify eligibility and excesses, along with mapping all IRA balances and possibly doing some conversions.
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