Estimated reading time: 4 minutesWhether you barely know what “IRA” stands for, or you’ve been contributing to one for years, you could be making mistakes with your retirement fund that are costing you big time. When it’s time to withdraw from your account, you don’t want to discover that you could have been saving more or saving smarter after all of those years of hard work. The earlier you educate yourself on IRAs, the better off financially you’ll be at the time of your retirement, or you may even get to retire early! Below are six common mistakes people make regarding their IRA and how to avoid them before it’s too late.
Not starting soon enough. It makes sense that the earlier you start saving for retirement, the more money you will have at the end. However, few Americans start saving for retirement right out of college, let alone during their first job. After college many people have loans to pay back, rent, bills, and maybe even credit card debt they need to bring down. Retirement might be the last thing on their minds. The thing is, most people won’t even notice a 3-6% decrease in their monthly take-home pay, which can in fact yield substantial future rewards. Teenagers have the greatest advantage because not only are they getting a head start with their savings, but they also have the least amount of expenses their paychecks need to cover.
If you are already well into your 30s, or even 40s, and are becoming increasingly nervous about how far behind in your goal you’re slipping, there are still a few options to give your IRA a boost. Immediately deposit any bonuses, raises, or other extra sources of income into your account as if it never existed. You alone are responsible for your retirement funds, so always research different ways you can increase your bottom line. Some examples are explained in points below; and the more disciplined you are with these actions now, the more comfortable you will be in retirement.
Not saving enough. Few Americans reach the age of retirement and think, “Wow, I have saved so much money for retirement. I could live comfortably for decades!” Sadly, the opposite is often true, and many are forced to work longer than they planned or scramble to find another source of income just to survive. Not only do people start saving for retirement later than they should, but when they do start saving, they don’t contribute enough to meet their goals. In fact, the gap between what the average American actually has saved for retirement versus what they should have saved widens as age increases, suggesting it gets harder to save the older we get. With child related expenses and caring for aging parents, along with life’s typical bills, the average middle-aged couple may find it difficult to justify a partial pay decrease to use towards retirement. However, not contributing at least the maximum amount your company is willing to match (for your 401K) is basically refusing to take free money. If your budget can handle it (usually it can), always contribute your company’s maximum match to effectively double your funds. If you have enough to contribute to both a 401K and an IRA, do so.
Neglecting spousal contribution. You may think that if one spouse doesn’t work, they can’t contribute to retirement; but that’s not the case. As long as a couple is married, file jointly on their tax return, and earn enough money to make double contributions, the non-working spouse can use the working spouse’s income to make payments into their own IRA. Many couples don’t know they can double their funds this way. And, if the spouse ends up working at a later time, they can use the account they’ve already set up to contribute their personal income into.
Neglecting retirement education. From different types of IRAs to when withdrawals should be made, there are many facets of your retirement you need to learn before you make a mistake that can cost you thousands. Know the difference between a standard IRA and a Roth IRA, and which one you qualify for. You might even qualify for both! Learn how and when you can make penalty-free withdrawals and how much you need to be taking out annually once you reach 70 ½ years old. Not adhering to the rules can majorly reduce your hard-earned savings. Lastly, educate yourself and your family members on how the transition of your funds will occur if you were to die suddenly. If they wait too long, they may not have access to the money left to them. Again, you are responsible for your own finances, and learning more now can save you time and money later.
If you don’t have an IRA or 401K, get one immediately. The sooner you start the habit of saving for your retirement, the easier it will be to continue the trend, plus you’ll thank yourself for it later. If you have an IRA, be actively involved in growing it. Never stop researching ways to increase your funds. With a little work and smart decision making, anyone can set themselves up for a comfortable retirement.