Protect Your Retirement: Don’t Make These Tax Mistakes

Saving money for retirement is important and can be done more easily with the help of tax-advantaged accounts such as an IRA or an ISA.

However, when you have worked hard, put your money into an IRA or ISA and done everything right, you can still jeopardize your successful retirement by making some simple money mistakes. To help make sure you do not lose what you have worked so hard to save and earn, here are some tax mistakes to watch out for.

1) Rolling over your IRA too often or improperly

When you move money from a 401K to an IRA or from one IRA to another, there are special rules in place in order to avoid tax consequences. If you fail to follow these rules, your money move can be considered a distribution rather than a roll-over.
This can have serious tax consequences as you may have to pay taxes and penalties for taking the money out of the IRA. Before you move your money, check with an experienced financial advisor to make sure you do it right. You also need to avoid moving your money too much as you are allowed only one IRA to IRA roll-over per year before you are considered to have taken a distribution.

2) Failing to consider your retirement account when you are planning your estate

You must remember to name a beneficiary for an IRA or an ISA account in order to make sure that the money goes to the person you want it to go to.

If you are going to leave your money to more than one beneficiary, you will also want to spell out exactly who is to receive what. This is so there is no money wasted as your beneficiaries squabble over who is supposed to receive funds from the IRA or ISA.
In some cases, you may wish to use tools like an IRA trust when you name a beneficiary. This would prevent your beneficiary from spending the money all at once and taking it in one lump sum.

When setting up the trust, it again needs to be done carefully and in accordance with your financial advisor in order to make sure that you are doing everything right and following all guidelines. Otherwise, your efforts could be ineffective.

3) Not understanding the tax rules of your retirement account

When you invest in an IRA or an ISA, there are rules associated with maintaining the tax-advantaged nature of the money. For instance, with traditional IRAs, you must begin to take distributions when you reach a designated age.

It is also very important to not withdraw money before you have reached an age where you are allowed to do so, or unless the reason for your withdrawal falls into an exception and is permitted.

When you take money out of an IRA prematurely, you may have to not only pay taxes on the IRA distribution, but also pay penalties associated with early withdrawal as well. These penalties can be significant.

Cashing in your IRA or ISA can thus deplete the money you have tried to save, leaving you with far less than you would have had if you had followed the rules and waited to take the money out. Not only that, but cashing it in too often at improper times can trigger multiple penalties and tax consequences that could dwindle your investment down to nothing.

Whether you have an IRA, an ISA, a 401K or any other type of special retirement account, do not take action without knowing the implications.