Avoid mistakes with retirement accounts that could end up hurting your finances. Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
348 MG 10 Costly Retirement Account Mistakes to Avoid (Part 1)
Imagine what's possible when learning doesn't get in the way of life. At Capella University, our FlexPath learning format lets you learn on your own schedule. A different future is closer than you think, with Capella University. Learn more at Capella.edu. Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's Invested at Work podcast, where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstanley.com/investedatwork, or stream on Apple or Spotify, because we believe that when employees thrive, your company thrives too. Again, visit morganstanley.com/investedatwork to listen today. Podcast listeners, welcome to another weekly edition of Money Girl. I'm Laura Adams, the author of Money Girl Smart Moves to Grow Rich. Grab a copy of the paperback or ebook from your favorite bookseller. To get more money tips and advice not mentioned in the podcast, be sure to sign up for the free Money Girl newsletter at quickandertietips.com. Be sure to connect with me on social media, or read a transcript of this show, which is episode number 348, called 10 costly retirement account mistakes to avoid part one. One of the best ways to make sure you have a happy financial future is to get in the habit of setting aside money every month in a tax-advantaged retirement account. But with all the rules and regulations that come with these accounts, you may be worried that you'll slip up and make a costly mistake. In this two-part series, you'll learn 10 retirement account mistakes that could end up hurting your finances and how to easily avoid them. We'll cover IRAs in this episode and then workplace accounts in part 2. One of the easiest ways to start putting money aside for retirement is to open up and contribute to an individual retirement arrangement or IRA. These accounts allow you to set aside money with some really nice tax savings. The great thing about an IRA is that you control it, not an employer, it's available to just about anyone who has earned income, even minors. For 2013 and 2014, you can contribute up to $5,500, or up to $6,500 if you're age 50 or older. Once you have money in an IRA, you have a lot of options. You can invest it, put it in a bank CD, or even keep it in a savings account. There are two main types of IRAs that you might choose, traditional and Roth. With a traditional IRA, you get a tax deduction for your contributions each year. In other words, the income you set aside isn't taxed. Plus, you don't pay tax on the earnings and growth in the account until you withdraw money in retirement. With a Roth IRA, you don't get a tax deduction for your contributions. They're actually taxed before going into the account. However, the earnings and growth in the account are never taxed, even when you take withdrawals in retirement. Note that there are annual income limits that you can't exceed in order to make Roth contributions. For more about a Roth, be sure to listen to a previous podcast that I did called "Your Guide to the Roth," part one, and part two. These are episodes number 272 and 273. No matter if you choose a traditional or Roth IRA, the tax benefits can turbocharge your savings more quickly than if your money was in a taxable brokerage account. The more you contribute each year, the more you'll benefit from the tax savings and make progress toward your retirement goals. Now that you know the IRA basics, here are five costly mistakes you should avoid. Mistake number one, making an early withdrawal. Remember that a retirement account is designed for retirement. That means you're not supposed to touch it until you reach the official retirement age of 59 and a half. If you make a withdrawal from your traditional IRA before retirement, not only will you have to pay taxes on the amount, but typically also a steep 10% early withdrawal penalty. A Roth IRA allows you to withdraw contributions because they were previously taxed, but if you withdraw earnings before retirement, they will be subject to tax and a 10% penalty. Mistake number two, assuming you can't contribute. I mentioned that you must have earned income to be eligible to make an IRA contribution, but there's an important exception to that rule that many people miss. If you're married and file a joint tax return, you and your spouse can both contribute to an IRA, even if only one of you has earned income. This is great news for anyone who might be a stay-at-home parent or temporarily unemployed. The total contributions to your IRA and to your spouses may not exceed your joint taxable income or the annual contribution limits, whichever is less. For 2013 and 2014, that means you could both max out IRAs as long as you earn at least $11,000 as a couple or $13,000 if you're both over age 50. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then IXL is a right for your family. IXL is an online learning program for kids covering math, language arts, science and social studies. IXL has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards, and explanations for wrong answers. IXL figures out what your kids need more help with and recommends more topics to practice. They're videos, lessons, sample problems, and learning games, too. One subscription to IXL gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder IXL is used in 95 of the top 100 school districts. I think the positive feedback that IXL gives is really crucial when it comes to learning. So make an impact on your child's learning. Get IXL now and money girl listeners can get an exclusive 20% off IXL membership when they sign up today at IXL dot com slash money girl. Visit IXL dot com slash money girl to get the most effective learning program out there at the best price. Hear that? Pumpkin. That's fall calling. And the pumpkin spice latte is back at Starbucks from that first sweater to late autumn weather. It's all a fall in just one sip. Order ahead on the Starbucks app. Imagine what's possible when learning doesn't get in the way of life. At Capella University, our flex path learning format lets you learn on your own schedule. A different future is closer than you think with Capella University. Learn more at Capella dot edu. Mistake number three, not using rollovers. If you leave a job where you had a workplace retirement account such as a 401k or 403b, don't forget about your money. An easy way to consolidate one or more retirement plans is to roll them over into an IRA. Doing a rollover involves three easy steps. First, you open a new IRA. Second, you initiate a rollover from your former employer's plan custodian by submitting a distribution request using a paper or online form. And finally, you choose how to allocate your money in the new IRA. Doing a trusty-to-trusty transfer, which is also known as a direct rollover, is best, so your money goes straight from your old plan into your new IRA and there are no tax implications. If you keep any portion of a rollover distribution longer than 60 days, you'll owe income tax plus a hefty 10% penalty if you're under age 59 and a half. Mistake number four, thinking you missed the contribution deadline. While December 31 is the deadline to contribute to some types of retirement accounts, that's not the case with IRAs. You actually have three and a half more months until tax filing day to make a traditional or Roth IRA contribution for the previous year. So, while it's best to make retirement contributions earlier, rather than later, putting it off until after the new year is okay, just don't miss the April 15 deadline. Mistake number five, waiting to get started. Many times what hurts the most isn't picking the wrong investment. It's waiting too long to get started investing in the first place. The earlier you get into the habit of putting money aside for the future, the better. You can avoid the natural tendency to procrastinate and make excuses by setting up monthly automatic transfers from your bank account into your IRA. After a while, you won't even realize the money isn't there and you'll adjust your spending to what's left over in the bank account. So, a quick review, mistake number one, making an early withdrawal, mistake number two, assuming you can't contribute, mistake number three, not using rollovers, mistake number four, thinking you missed the contribution deadline and mistake number five, waiting to get started. Spending patience and making consistent investment contributions is an easy way to achieve a huge amount of financial success and happiness. I'm glad you're listening to Ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. Imagine what's possible when learning doesn't get in the way of life. At Capelli University, our game-changing Flex Path learning format lets you set your own deadline so you can learn at a time and pace that works for you. It's an education you can tailor to your schedule. That means you don't have to put your life on hold to pursue your professional goals. Instead, enjoy learning your way and earn your degree without missing a beat. A different future is closer than you think, with Capelli University. Learn more at Capella.edu. Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's Invested at Work podcast, where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstandley.com/investedatwork or stream on Apple or Spotify, because we believe that when employees thrive, your company thrives too. Again, visit morganstandley.com/investedatwork to listen today. [BLANK_AUDIO]