***Try to Avoid These Stupid IRA Mistakes

written by A.T. "Al" Benelli, CFP, FIC

It’s been just about a month since the traditional IRS Income Tax filing deadline of April 15. Many of us either took advantage of our IRAs last year or we now we wish we had. Since it’s not to late for the current tax year of 2010 it’s a good time to review these do’s and don’ts of successful IRA management from the Financial Planning Association.

Mistake No. 1 – Failure to start: Do you have either a traditional or Roth IRA as part of your retirement strategy? If not, get some advice – a Certified Financial Planner™ professional is a good start – to review your overall retirement options and give you some ideas where to start. The when part is easy. It’s now!

Mistake No. 2 – Not comparing the advantages of traditional IRAs and Roth IRAs: The biggest differences between a traditional IRA and a Roth is the way Uncle Sam treats taxes on both types of IRA investments. If you put money in a traditional IRA, you’ll be able to deduct that contribution on your income taxes. In a Roth, you don’t receive the tax deduction for those contributions, but when it’s time to take the money out, you won’t have to pay taxes on it. The benefits of each affect taxpayers differently.

Mistake No. 3 – Failing to make sure your beneficiaries are correct: Starting back in 2007, a direct transfer from a deceased employee’s IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity, 403(b) plan or a governmental deferred compensation plan to any qualified IRA can be treated as an eligible rollover distribution if the beneficiary is not the deceased’s spouse. That means your kids or any other designated recipient can inherit your IRAs without negative tax consequences at that time. Non- spouse beneficiaries need to check with a tax expert when they must begin distributions from an inherited IRA. Of course, no matter what the investment, make sure your beneficiaries are always current.

Mistake No. 4 – Frittering away your tax refund: Did you know you could deposit your tax refund directly into your IRA? It works for a health or education savings account as well. While many people use their tax refund as a bonus to buy a treat or pay off bills, consider making a deposit to your IRA so you can note that deposit for the 2010 tax year by next April 15.

Mistake No. 5 – Forgetting retirement savings benefits for active military personnel: The Heroes Earned Retirement Opportunities (HERO) Act allows active military personnel and their families to put a greater contribution toward their traditional or Roth IRA accounts. The act allows tax-free combat pay to be considered as earned income to determine the contribution amount for traditional and Roth IRAs. Before, a military person who earned only combat pay wasn’t allowed to contribute to either form of IRA.

Mistake No. 8 – Withdrawing money early from an IRA or blowing a rollover: Money taken out of an IRA is subject to income taxes and a penalty if you are under 59 ½ years old and do not put it back into an IRA within 60 days. When moving assets, most of the time a trustee-to-trustee transfer can be more efficient and with less margin for error. If the IRA distribution check is made payable to you, there is a greater chance you’ll miss the 60-day deadline and you’ll face taxes and penalties.

Mistake No. 9 – Not doing your homework on a Roth IRA Conversion. For 2010 the income limitations have been suspended for Traditional-to-Roth IRA conversions. This may sound like a wonderful opportunity; however, not all taxpayers are going to benefit from a Roth conversion.

There are too many factors to consider to try to list here. My advice: talk to your tax professional or financial advisor before converting IRA assets to Roth. You could be making a huge mistake.