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6 IRA Mistakes to Avoid Portfolio Matters | Christine Benz

Mistake 2 | Thinking of it as an either/or decision— Roth versus Traditional.

Some investors might assume they need to be dog- matic about which IRA type they choose: Roth or Traditional. But savvy investors often end up with a blend of Traditional IRA and Roth accounts, both by happenstance and by design. For example, some- one who could contribute to a Traditional IRA in the past may no longer be able to deduct her contribution because of income limits, but she can still fund a Roth IRA provided her income falls below the Roth threshold. Moreover, the concept of tax diversification is a valuable one and argues for building balances in all three account types: taxable, tax-deferred (Tradi- tional IRA and 401 (k)), and Roth. For one thing, few people can forecast whether their tax rates will be higher or lower in retirement than they are now, so holding multiple accounts is a good way to hedge against multiple outcomes. Income levels while you’re working may also fluctuate: A low tax-rate year can be a good time to fund a Roth, while a deduct- ible Traditional IRA contribution can be more valuable when your tax rate is on the high side. In addition, holding taxable, Roth, and tax-deferred accounts gives a retiree the ability to obtain varying tax treatments of her withdrawals, thereby keeping taxable income lower. You can even split your contributions among each account type in a single tax year, just so long as your total contributions don’t exceed the maximums ($ 5 , 550 for those under 50 and $ 6 , 500 for those older than 50 .) Contributing to a Traditional nondeductible IRA is the only available contribution type for people who earn too much to fund a Roth IRA (and by extension earn too much to deduct their Traditional IRA contri- bution because income limits are even lower there). And opening a Traditional nondeductible IRA and then converting it to a Roth IRA can be a valuable maneuver for many high-income savers because there are no income limits on conversions. (More on this below.) But opening a Traditional nondeductible IRA Mistake 3 | Making a nondeductible IRA contribution for the long haul.

The clock is ticking for IRA contributions that will count for the 2013 tax year—you have until April 15 , the tax-filing deadline. At first blush, funding an IRA might seem like one of those tasks that you should be able to knock off in 10 minutes: Pick your provider and the investments, fill out the form, and send in your money. But some important decisions are embedded in those simple tasks: whether to choose a Roth IRA or Traditional IRA , for example. In this column, I’ll tackle some mistakes that investors make when it comes to their IRA contributions. In a future article, I’ll discuss how it’s possible to go wrong with the investments you choose to hold inside your IRA . If you’re rushing in your IRA contribution for the 2013 tax year, you’re getting tripped up right out of the box. And that’s a big segment of IRA contributors: More than double the amount of IRA contributions are made at the last minute (the tax-filing deadline) than are made at the beginning of the tax year (in this case, Jan. 1 , 2013 ), according to Vanguard research on the topic. Over time, missing out on the benefit of tax-advantaged compounding—even if it’s only 15 months’ worth at a time—can add up to some serious money, according to Vanguard’s research. And even investors who fund their IRA s may delay in selecting their investments; that, too, can weigh on returns over time. Younger investors, in particular, should make a point of getting their IRA contributions invested in long-term securities at the earliest opportunity. Mistake 1 | Waiting until the last minute.