16
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
.
Mistake 1
| Waiting until the last minute.
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 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
.)
Mistake 3
| Making a nondeductible IRA contribution
for the long haul.
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
6 IRA Mistakes to Avoid
Portfolio Matters
|
Christine Benz
