Is Your IRA Working Against You? 5 Common Mistakes to Fix Now

We know IRAs can be powerful tools for building wealth, but they come with specific rules and regulations that, if overlooked, can lead to penalties and missed opportunities.

The good news? We are here to help you navigate the complexities. Here are five tips to help avoid some common (and costly) IRA mistakes:

Don't Overlook Your Beneficiary Designations

(and Keep Them Updated)

This is perhaps one of the most critical, yet often neglected, aspects of IRA planning. Your IRA beneficiary designations dictate who receives your assets upon your death, superseding your will. Failing to name a beneficiary or having outdated information (like an ex-spouse) can lead to your IRA going through probate, delaying distribution, and potentially subjecting it to unintended tax consequences for your heirs.

Action Step

Review your IRA beneficiary designations annually - especially after any major life events like marriage, divorce, birth of a child, or death in the family. It’s important to have both primary and contingent beneficiaries named.

Understand Contribution Limits and Income Thresholds

Contributing too much to an IRA incurs a 6% excess contribution tax each year that the excess remains in the account. Conversely, not maximizing contributions means missing out on tax-advantaged growth.

For 2025, the IRA contribution limit is $7,000, with an additional $1,000 catch-up contribution for those age 50 and older ($8,000 total). Remember, Roth IRAs also have income limitations for direct contributions, so be mindful of those thresholds to avoid an ineligible contribution.

Action Step

Stay informed about IRA contribution limits and any income phase-outs that apply to your specific IRA type (Traditional vs. Roth). If your income is too high for a direct Roth contribution, ask us about a "backdoor Roth IRA.”

Be Mindful of Early Withdrawal Penalties

IRAs are designed for retirement savings, and the IRS generally imposes a 10% early withdrawal penalty (in addition to ordinary income tax) on distributions taken before age 59½ from traditional IRAs. While there are some exceptions (e.g., for qualified higher education expenses, first-time home purchases up to $10,000, or certain medical expenses), it is important to understand these rules to avoid unnecessary taxes and penalties. For Roth IRAs, you can generally withdraw your contributions tax and penalty-free at any time, but earnings are subject to rules.

Action Step

Plan your finances to avoid tapping into your IRA before retirement. If an unexpected financial need arises, consult with us to determine if an exception applies and discover the most tax-efficient way to access funds.

Don't Miss Your Required Minimum Distributions (RMDs)

When you reach your specific RMD age, you generally must begin taking Required Minimum Distributions (RMDs) from your traditional, SEP, and SIMPLE IRAs, as well as most employer-sponsored plans like 401(k)s.

The RMD age depends on your birth year:

• If you were born in 1950 or earlier, you should already be taking RMDs.

• If you were born between 1951 and 1959: Your RMD age is 73.

• If you were born in 1960 or later: Your RMD age is 75.

Failing to take your RMDs, or taking too little, can result in an excise tax of 25% on the amount not distributed. This penalty can be reduced to 10% if the RMD is corrected and the IRS is notified promptly (generally within two years).

Roth IRAs are exempt from RMDs during the original owner's lifetime. (This also now applies to Roth 401(k)s and other designated Roth accounts in employer plans as of 2024 due to SECURE 2.0, which is a significant change).

Action Step

Familiarize yourself with RMD rules. We’ll help you calculate your RMDs, so you take them on time and avoid penalties. Simply reach out.

Carefully Consider Rollovers and Conversions

Rolling over funds from an employer-sponsored plan to an IRA, or converting a traditional IRA to a Roth IRA, can be excellent strategies. However, these transactions have specific rules. For instance, a 60-day rollover can be risky, and direct transfers are generally safer. Roth conversions are taxable events, and a misunderstanding of the "pro rata" rule can lead to unexpected tax bills.

Action Step

Contact us for guidance if you have a complex IRA rollover or conversion. We’ll execute these transactions strategically, with the goal of minimizing your tax liability and maximizing your retirement savings.

When it comes to your IRA, it is important to be proactive. Remember: We are here to help. Reply to this email if you have any questions or if you would like to review your IRA strategy together.

Get Started Today!

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Investment advice offered through Integrated Partners, a registered investment advisor, doing business as GC Wealth Advisors and its investment advisor representatives, Christopher Conner, Jason Rankin, Adam Tirapelle, and Kyle Trippel.

Grimbleby Coleman Advisors & Accountants and its individual partners are solicitors to Integrated Partners and are not registered investment advisor representatives. Solicitors do not provide investment advice and are compensated solely for their referral services. Click here for copies of the firm’s ADV, CRS, and solicitor disclosure statement.

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