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.

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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

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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

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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.