Common and Costly Ways You Can Screw Up With an IRA
Ignore your retirement account's rules or make other blunders, and you could be out thousands.wavebreakmedia / Shutterstock
An IRA offers a pretty easy way to build up enough money for a comfy retirement at home, out of state, or maybe on a beautiful island somewhere. And, you get some tax benefits in the process.
But an individual retirement account -- or arrangement, if you want to get technical -- isn't foolproof. There are pitfalls that can cost you thousands in penalties or lost earnings.
Avoid these common and potentially very costly IRA errors.
1. Not contributing enough
To receive the maximum benefit from your retirement account — the biggest possible nest egg, grown through investments — you want to put the maximum amount into your account each year.
The 2019 limit on IRA contributions is $6,000, or $7,000 if you're 50 or older.
With a traditional IRA, you contribute pre-tax dollars from your pay, and you may be able to deduct the amounts from your taxes, too. Your withdrawals in retirement are taxed as ordinary income.
With a Roth IRA, contributions get no tax breaks, but withdrawals are tax-free.
2. Contributing too much
Funding your IRA is like the bidding on The Price Is Right: You want to hit your contribution limit without going over.
If you exceed the threshold in any year, it can be almost as bad as going home from a game show empty-handed, without the new dinette set.
The IRS will charge you a 6% penalty tax on the excess amount for each year that it remains in your IRA, until you've either removed it or have reduced a future contribution to compensate.