[ad_1]
The Roth IRAs continue to gain popularity as vectors of retirement savings. This stems from the fact that Roth IRAs offer considerable tax benefits. Not only do they protect your investments from capital gains taxes and dividends, but they also allow you to withdraw your funds at retirement without paying income tax.
However, taking full advantage of a Roth IRA means avoiding several mistakes that can cost you money in the form of taxes, penalties, and attorney fees. Here are three common and expensive mistakes to know and avoid.
Roth IRAs come with rules that must be followed. Source of the image: Getty Images.
1. Excessive contribution
In 2019, workers under the age of 50 can contribute up to US $ 6,000 to a Roth IRA. People over 50 can contribute up to $ 7,000. However, if your income exceeds a certain amount, you may not be able to pay the full amount, or nothing at all. To make the maximum annual contribution, you must have a gross income of less than $ 122,000 if you are single and $ 193,000 if you represent half of a married couple. The amount you can contribute decreases when your income exceeds these amounts. Once your income exceeds $ 137,000 as a single filer or $ 203,000 as a married couple filing jointly, you are no longer eligible to contribute to a Roth IRA.
If you contribute more to a Roth IRA than you are allowed, you will have created what is called "an ineligible excess contribution", which may result in tax penalties. More specifically, the fine for ineligible contributions is 6% of the ineligible amount. You pay this penalty when you file your tax return with the help of Form 5329. To avoid the 6% penalty on excess funds, it's important to know if you can contribute to a Roth IRA and how much of it is. 39, money you can place on the account. each year based on your age and income. An over-contribution is an easy mistake to make, especially if a recent increase in your income suddenly made you ineligible to pay the same amount you had already made.
2. Take out the money early
Withdrawing money early can be a trap with many investments. But it can be particularly expensive if this investment is held in a Roth IRA. If you withdraw money from a Roth IRA before the age of 59 1/2, the amount withdrawn may be subject to a 10% penalty, as well as a tax. on income on "accumulated earnings". Any money you withdraw beyond the amount of your initial contributions to a Roth IRA is considered an "income" and is subject to income tax.
The good news is that there are some notable exceptions to this rule. For example, if funds are used to purchase your first home or if they are distributed to your beneficiaries upon your death, the withdrawal will not be subject to penalties or taxes. There are also breaks available for people using a Roth IRA withdrawal to pay college fees. You should also remember the "five-year rule", which requires your Roth IRA to be open for at least five years before you withdraw funds, lest you incur taxes and penalties.
Given the severe penalties and taxes involved, it is advisable to withdraw money from a Roth IRA only as a last resort in case of emergency. And keep in mind that the IRS has good reason to impose these restrictions on your withdrawals: This money is meant to help you stay financially secure in retirement, not to cover expenses short term.
3. Forget to list the main and auxiliary beneficiaries
When setting up a Roth IRA, it is important to pay close attention to the fine print and to properly complete all forms and documents. This includes the list of primary and auxiliary beneficiaries of the account. Forgetting to name the beneficiaries of your Roth IRA can cause big headaches to your heirs. The money in your account will be paid to your estate, which means that it will be subject to probate. And probate can be a complicated process that forces your heirs to pay heavy legal fees to access money.
Remember to name the beneficiaries when setting up a Roth IRA for the first time and make sure to update the account documents if you want to add or remove recipients. For example, if you divorce, you may want your former spouse to be a beneficiary and if you have grandchildren, you may decide to leave them some money.
The Roth IRAs are excellent vehicles for investment. But, like most retirement savings vehicles, they have their own set of rules and procedures. Non-compliance can lead to costly problems.
[ad_2]
Source link