Get More Money in Your Roth IRA by Avoiding These Mistakes

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Many types of retirement plans are available today, but you have only so much time to put money into them. If you have a Roth IRA, it can be easy to think your money is secure. Unfortunately, just because it offers options that other plans do not will not make it safe from mistakes that you might make.

Here are some mistakes that Roth IRA owners often make.

Not Contributing More

Traditional 401(k)s and IRAs do not let you make contributions after you turn 72. A Roth IRA enables you to make contributions beyond 72 if you are still working. This feature allows you to continue to build your retirement savings. You also do not need to get the required minimum distributions (RMDs)—letting your money gain even more.

The limit on Roth IRA contributions is that, according to Investopedia, you cannot contribute more than you earn. You also need to watch the total amount of your contributions, BonfireFinancial says, because the total of your contributions—no matter how many accounts you have—cannot total more than the allowable contributions for the year.

Avoid Contributing If You Earn Too Much

Contribution limits exist on a Roth IRA that may prohibit you from making contributions if you make too much money. The limits are based on your modified adjusted gross income (MAGI). If you are married filing jointly or a qualifying widow or widower, you cannot make more than $218,000 in 2023 and contribute the full amount of $6,500—or $7,500 if you are over 50. There is a phase-out range between $218,000 and $228,000, but more than that and you cannot make any contributions.

Singles can make contributions of $6,500 if their MAGI is less than $138,000, but they cannot contribute if they earn more than $153,000. Schwab provides more details in a chart on its website.

Not Understanding the Cost of the Rollover

When you rollover to a Roth IRA, you can convert as much as you want. The contribution limits do not apply in that case. There could be a considerable cost when making the rollover, NewRetirement says, because you will need to pay taxes on the total amount you transfer. The Internal Revenue Service treats it as income, and you will pay taxes at the level of your current income tax bracket.

Consider Using a Backdoor Roth Contribution

One way to get around contribution limits is using a backdoor Roth IRA conversion. Many rich people use this technique often. The method allows you to deposit up to the $7,500 limit into a new IRA, then transfer it to the Roth IRA. The amount transferred will not affect your regular contribution limits.

This method can create a problem that leads to paying taxes on some of the total amounts transferred. If the money (or part of it) is from a pretax IRA account, the pro-rata rule comes into effect. You will pay taxes on some of the money according to a formula the IRS has made.

Failing to Contribute for Your Spouse

You can create a separate IRA for your spouse, even if they are not employed. Investopedia says it is called a spousal IRA and can be a traditional IRA or a Roth IRA. The limit still applies that you cannot contribute more than you earn. For two accounts in 2023, the limit would be $13,000 per year, or $15,000 if older than 50.

Contributing Too Much

The IRS is serious about how much you can contribute annually to a retirement account. If you contribute too much—even by accident—you will pay a 6 percent penalty on money above the limit until you correct it. TheBalanceMoney says that you will pay the penalty each year the money remains in the account. You can withdraw the excess money before your deadline for filing taxes, but you will also need to withdraw the interest.

Not Doing a Rollover Right

When you have a 401(k) and put the money into a Roth IRA, it’s called a rollover. If the rollover does not follow the rules, there can be tax problems. An important rule is to complete a rollover, TheBalanceMoney says, into a Roth IRA within 60 days. If you fail to meet the deadline, you could face a 10 percent penalty tax on early distributions. One way to avoid this penalty is to conduct a trustee-to-trustee transfer.

Not Naming Any Beneficiaries

When you die, your beneficiaries will receive the remainder of the money in the Roth IRA. It can be an excellent way to pass on your retirement fund, but you must have your beneficiary choices named on your account. Otherwise, the money goes into the estate, and then it will go through probate court—where a chunk of the money will go to your debtors and the state as taxes.

Not Investing Your Money

After you do the rollover and put your money into a Roth IRA, there is still more to do. The next thing is to choose some investments for your cash to let your money start seeing growth. Before choosing your investments, you should consider your age and risk tolerance.

After selecting your investment options—where your money can earn interest, and compound interest—you can choose your investments or let a financial professional help you. You can also get an account managed by robo-advisors.

Forgetting the Five-Year Waiting Period Before Making Withdrawals

Once you open a Roth IRA, there is a five-year waiting period before you can withdraw any money without a penalty. If you take out money too early—before five years—you will be charged a 10 percent early withdrawal penalty.

There are many ways to get the most benefits from a Roth IRA. Avoid making mistakes by getting professional advice, and watch your money grow as fast as possible. Remember that some years—due to the economy—may not be as productive as other years.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

Mike Valles

Mike Valles has been a freelance writer for many years and focuses on personal finance articles. He writes articles and blog posts for companies and lenders of all sizes and seeks to provide quality information that is up-to-date and easy to understand.

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