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If you are planning for retirement and saving in an IRA, what are some mistakes you should look to avoid so that you can have a successful retirement? In this episode of the Retire Once Show, we discuss mistakes that could end up costing you money in taxes or mistakes that can impact your intended beneficiaries.
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- Johnathan Rankin CRPC® CEPA®, Founder & CEO
- Melissa Rankin - Wealth Management Advisor
- Theorem Wealth Management, Financial Advisor Dallas Texas
- Retire Once Show - 2022 Retirement Podcast Series
0:00 - Introduction
1:25 - Beneficiary Mistakes
4:01 - Inherited IRA Advice
6:08 - Timing IRA Contributions
7:55 - Roth vs Traditional
9:27 - NonDeductable Contributions
10:34 - Ignoring NUA
12:50 - Tax Mistakes
14:41 - RMD Mistakes
16:09 - IRA Investment Mistakes
17:40 - Halting Contributions
19:37 - Ignoring Asset Locations
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Disclaimer: Johnathan Rankin is a Registered Representative of Sanctuary Securities Inc. and an Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.
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Hello, and welcome to the retire wants show the show designed to help you get to retirement, but most importantly, stay retired. I'm your host, Jonathan Rankin. And I am joined as always by my lovely co-host. Hi, I'm Melissa Rankin. Thank you for joining us. And we have a great show for you today. Today, we are gonna be talking all about the top IRA mistakes that you should.End of line reread topic today. We're gonna be talking all about the top IRA mistakes that you should avoid. Now. You just need to go fall off a bike. I'm sorry, but I don't care if you are on the left or on the right. That was funny when he repeated the line. So anyway, if you don't know what I'm talking about, You think that was funnier than when he fell off his bike?I think it was absolutely funnier than when he fell off the bike. I don't know. I relate so much to falling off the bike. That it's hard not to think that's comical. I know, but you are also not close to 80 years old, so it's, it's a different, I know, but I also can't ride a bike. Well, either way. I thought that was funny, what?He just kept reading on the teleprompter. So that's what we're doing here, reading from a non teleprompter teleprompter. So, um, but that's what we're gonna be talking about today. Uh, once. The top IRA mistakes to avoid. So Mel, where should we get started here? So to start with the, the, the top things to avoid, I think that we go right into planning mistakes.I mean, I feel like that's the most basic place to start. I do. I agree. And so what would be the first planning mistake that someone can make beneficiary mistakes? Yeah, that's a big one. Uh, whether that's not putting beneficiaries on an account, uh, this happens a lot. I've seen people where, you know, some beneficiary designations require social securities and date of births.And, you know, to be honest, there are times where I can barely remember, you know, Your date of birth. So let alone our kids or their social security numbers. I don't have that stuff on the top of my mind. So I can imagine how, when filling out documents, there's a reason why I always call you every time I have to fill out some sort of beneficiary form, because even though all of those things, so forgetting to list someone is important.Even if you have an estate plan put together, you know, people spend thousands of dollars putting. Wills and trusts, but you gotta remember beneficiary designation forms, supersede complex estate plans or estate plan in general. It's interesting because there's so many IRA accounts where you don't even have to have beneficiary and information to open it.Yeah. So of course people are like, well, that can't be that big of a deal if I don't need it to open it. So yeah. And so not putting one in general, but then you go a step. Not having contingent beneficiaries on an account as well. Now, if you're not familiar with what a contingent beneficiary is, this is who gets the account.If something were to happen to the primary, if we die together, That's correct? Yes. If her and I passed away, cuz we're each other's primary, then you know, our kids would be listed as contingent or our trust in this case. But either way you list contingent beneficiaries to be that second in line. And then, uh, from there outdated beneficiaries, this is a common mistake, especially if you are divorced or maybe in a second marriage or whatever that may be.Anytime you go through a life changing. It's very important to update your beneficiaries or at least just review them because we've seen so many times where, you know, a someone would be married, get divorced, and then. Remarry, but then they never update the beneficiaries and the spouse. One is the beneficiary spouse two gets nothing at that point.So, I mean, that's a really awkward funeral. that is a very awkward funeral. So, uh, just make sure that if anything happens in life, any major life update. Update those beneficiaries, at least review them. And then you wanna make sure they're at least consistent with your estate plan. I think that is absolutely also important.So beneficiary mistakes, try to avoid those, cuz those are, are big ones that can be costly to those inheriting the in the account. And another big one. I mean kind of in that same, I guess idea not getting help on inherited accounts. I mean, inherited accounts are exactly what they say. I mean, it's something that's passed on to you from somebody who's passed away, but.That would never even happen if you didn't have your beneficiaries in line mm-hmm , but say everything's all good and great. The beneficiary then still has to do something with it. Yeah. And especially since the passing of the secure act a few years ago, it's really made inheriting an IRA a little bit more complex because now, you know, do I have to withdraw the total account in within 10 years?Can I stretch the account over the course of my lifetime? You know, what type of beneficiary am I, uh, exempt from that 10 year rule? There's so many different rules, uh, now, so when we look at beneficiaries, most beneficiaries have to liquid. Within 10 years for that, uh, they have to liquidate that inherited IRA within 10 years.Now, there are exceptions to that 10 year rule. So an exception would be if you are the IRA owner's spouse, if you're the IRA owners, minor child, uh, if you are a disabled beneficiary, chronically ill beneficiary, or you are a beneficiary that is not more than 10 years younger than the original IRA owner.So you could see. It get very convoluted. Yeah. It gets a little bit more complex. So, um, and plus leaving money directly to, you know, a child or, you know, someone with special needs that has many other considerations that are well above. Just getting help on a inherited IRA that's that's complex tax or, or complex, you know, financial planning that really should be done in that beneficiary phase.So just keep that in mind, if you're inheriting an. It's fi you know, seek help, you know, just reach out to someone, whether it's us, if you're financial advisor, a tax, you know, tax advisor, just to make sure that you're withdrawing that account over the specified timeframe. And what type of beneficiary are you?so, so far we have making sure you have the beneficiaries listed and correct, and up to date and making sure that the inherited account, whomever that goes to is acting on it. And then with that in mind, we take it a step further and it's waiting until the last minute to contribute. Yeah, this is for all those last minute planners that wait until April to make their contribution to their IRA from the previous year.So, you know, there was a study done by Vanguard where most or many of the investors who save in an IRA, this is what they do. They do it, you know, the, the year after, you know, they have really at that tax deadline for the previous year. Now, there are some disadvantages to that. So, you know, I think of running the risk of something could go wrong and you don't get it done in time.If you're trying to do something at the very last minute, you're not leaving yourself a good margin of. You know, and so if for some reason you were, you know, really wanting to make that contribution and you just couldn't for some reason at that last day. Well, now you're just, you missed out on that for the entire year, but also it gives it less time to compound.Now I only, I know we're only talking about a few months here, but still let's look at last year. If you were going to make your 20, 21 contribution, let's say January 1st of 20, 21, or, you know, April of 2020. Well, the market had a very strong year in 2021 that you would've missed out on. And you would've started investing in April, 2022 when we all know what's going on right now.So you, you run the risk of missing out on that time to compound. And what do they always talk about time in the market versus timing the market. So just gives you a little bit more time. So it's just something different way to look at that. I mean, procrastinators never prosper. just something to keep in mind, guys.I mean, we want you to be on the ball and ahead. That is very true. We do want you to be on the ball and well, ahead of all that. So, so with that in mind, takes us to our next warning warning point, if you will, assuming all Roth or all traditional is best. We've gone over this a few times in different episodes, but let's recap.Yeah. So thinking that you've gotta be all or none in either a Roth account or a traditional account is just the wrong way to think about it. You gotta always remember. A Roth is better, you know, determining whether a Roth is better or not is always based on when are you gonna be at your lowest tax bracket either now or in retirement, if your taxes are going to be lower now than they will in retirement, then yeah.A Roth will make sense. However, if you are in your highest tax bracket now, and you're gonna be in a lower one in retirement. Then a traditional IRA makes sense. Like Melissa said, we've gone over this a number of times through previous episodes, we'll link those up here. And so that way you could check those out, but, uh, it doesn't have to be, you know, an all or one either or decision you could do both.If you qualify based on your income. But it is something where, you know, dividing up those contributions might make sense because nobody knows what their tax bracket is really going to be if your retirement's 10, 15, 20 years down the road. So, uh, think of diversifying that asset location, as well as, you know, the investment, you know, inside of those accounts as well.always be thinking. Yeah, always. I feel like that's, that's our general rule. There is always be thinking, thinking ahead, thinking about your retirement, thinking about contributions, beneficiaries. I mean, we just really want you to be thinking out about a lot here. I mean, and if you don't want to think you could always reach out to us.That's what we're to all the thinking for you. That's right. All right. Number five. What is the fifth mistake that someone can make with an IRA, non deductible contributions for long term planning? Yeah. So if what a non deductible contribution is for those who don't know is let's just say that you make too much to be able to contribute to a Roth account, or be able to make a deductible contribution to an IRA.Well, you can make after tax non deductible contributions to an IRA, but letting 'em just sit in that IRA. You know, it poses long term problems because yeah. That money can grow. But ultimately like with every IRA, the moment you start taking money out, you're subject to ordinary income tax. And at some point required minimum distributions.If you're making non deductible. Contributions to an IRA, really use that as the kinda the proxy to be able to make those backdoor Roth contributions to help save on taxes down the road, because ultimately you already pay taxes one time when you contributed the money, there's no need to pay ordinary income tax.You know, when you're taking out in retirement as well, there's no reason to leave yourself susceptible, to being double taxed. Exactly. Actually, absolutely. So that leads us to our next point. Number six, ignoring N UA. And before we get into. Ignoring it let's talk about what UA is. Okay. SOA is known as net unrealized appreciation.And this is for individuals who are investing in their 401k and have company stock that they were able to purchase at a low cost basis. So when you think of you're investing in your 401k and maybe your company stock is a part of that, and you've been contributing for a long period of. And let's just say that that company stock is, you know, at $200,000 of value in your 401k, but your cost basis is 50,000.If you were to take your 401k and you rolled that into an IRA, no matter what you, when you start taking money out of that four or outta that IRA, you're subject to ordinary income tax. However, utilizing UA or net unrealized appreciation. What you do is you take that stock. You move that in kind. So you don't sell it.You just direct custodian to custodian, transfer it into an after tax brokerage account. Now you pay ordinary income tax on the cost basis. So in this case, $50,000 is a cost basis you pay in that year that you do the transac. Taxes on 50,000. Now, whenever you sell the stock, that $150,000 that you ultimately have in gains that is now taxed at long-term cap gains tax.So you're saving yourself the difference between ordinary income and long-term cap gains. So it makes sense on when you do it and how you do it. It is it, it does. And so just remember that once you process that rollover you can't, if you roll over all the assets into an IRA, You then lose the ability to utilize a, and that's why it's one of the mistakes that we want to go over.Because before you do any rollover from your 401k or company plan into an IRA, you really want to consider everything about that process, you know, should you be utilizing a, uh, and, and how does that affect you this year? How does that affect your long term? um, because if your cost basis let's say is, let's say you're below water on the stock.Well then maybe you're not gonna be able to take advantage of UA and there's no problem, which we hope that's not the case. Yeah. We definitely hope that's not the case, but all of that, you know, rolling from a 401k to an IRA really does bring us to, uh, to mistake number seven, we'll go through, which is huge tax mistakes, tax mistakes on rollovers.Absolutely. This is a big one. So when you're rolling money from a 401k into an IRA, Some, some providers, what they do is they send a check payable to the new custodian for your benefit. So it's a, it's a check that's not made payable to you, but it's made payable to whoever the new account's going to be with, but they send it to your address of record.Now they say they do this for, you know, security reasons because safe keeping. Yeah, because I mean, imagine if. You have a million dollars in your 401k and all of a sudden you didn't process it, but a million dollar check showed up. You'd kind of wonder what's going on. so, which I think is why they don't make it payable to the person directly.Well, yeah, because it, you know, they don't, it's not a. It's not a payment to you. Cause then don't be taxed. They don't want any confusion there. No, they don't want anybody to be able to cash it aside from the custodian. However, they do send it to the address of record, which is you. So if you have processed that, and let's say you go on vacation for two months or something happens a nice vacation, and you have to remember, you have 60 days to deposit that, check into the IRA.If you don't, then you might be subject to penalties on top of. All that distribution going right to your tax, your ordinary income tax. That's a nice way of putting it that you might be, you will most definitely have some kind of consequence yeah. Tax for sure. But you might have that additional 10% early withdrawal plan either way.It's not good. So don't do that. No, make sure if you're processing any sort of rollover from a 401k into an IRA that you are going through the process from start to finish before you leave town. See it all the way through. Yeah. Make sure that you're doing that. Uh, so that you're avoiding that 60 day timeframe and, and even running over.and that leads us into our next one. The RMD mistakes. Yeah. This one, once again, it's a, it's a big penalty. You never wanna miss an RMD because you're subject to a 50% penalty if you miss it, even if you miss it by a day. So just don't miss a you're very strict on those days. Nowadays you have to take required minimum distributions at 72, you used to be 70 and a half, but at 72, which was very confusing.It was why make it a half year? I mean, I think you, you stop thinking about half, half birthdays when you. 5 6, 7. I was gonna say after year one, I mean, oh, I dunno. Okay. I was gonna say after, you know, in your mid thirties, but cuz I, you know, oh, it's my half birthday, July that's right, exactly. So, uh, you, if you miss an RMD 50% penalty, but because RMDs are based on the aggregation of your pre-tax accounts, if you miscalculate and let's say you don't take enough, Then there's gonna be a 50% penalty on the amount you didn't take.But then the other side of it, you know, if you are taking required minimum distributions, but you don't need all that money, not reinvesting that money is a big mistake as well, because then you're just, you're taking money out to sit it in cash, just to pay taxes on it. You should reinvest that money because your entire retirement plan was likely predicated on long term growth.You living off a specific amount, so really work on reinvesting that money as well. So that leads us to investing mistakes, doubling up on tax shelters. Yeah, this is a, this is a big one. When it comes to municipal bonds. Uh, we hear about this at least a couple times a year because muni bonds, they always sound great.I want tax free income tax free income. And so you think of, I'm gonna take that tax free income. I'm gonna put it in my IRA, but you gotta. any dollars you take out from your IRA are going to be subject to income tax. So, you know, usually municipal bonds have a lower yield than traditional bonds because they're not subject to federal tax and sometimes they're state tax exempt as well.So if you're not having to pay tax, the tax equivalent yield is gonna be higher in a traditional corporate bond than it would in a municipal bond. So. Losing out on additional growth and you're still having to pay taxes. We see this, I've seen so many times where the idea makes sense where I want that tax free income.It sounds good in theory. Yeah. And so thinking about, you know, what makes sense from a, you know, from an asset class inside of an IRA, you know, even things like master limited partnerships, Those are a better fit in, uh, in a taxable account as well because of how that income is paid. Same thing with, uh, with municipal bonds.So make sure you're not trying to double up on taxation benefits because there are no taxation benefits in an IRA aside from the fact that you don't pay taxes until you take money out. So you don't wanna get too cute with it. No, don't get too cute with it. And that leads us into our next. Halting contributions due to market volatility.You definitely do not want to do this. Now. This is very, very prevalent right now, obviously, cuz we were going through market volatility. I know we touched on this before. Um, but it is important that we go over it again because I, I get this question. We can't say it enough. No, we can't say it enough. And I get this question honestly, a couple times a week.The market's going down. Should I just stop contributing to my 401k? But the reality is if you were contributing in November, then you were buying those same shares a lot higher than where you're buying 'em today. So, uh, why, you know, if we look at how the market is, you know, considered cheap or expensive, typically it's, you know, a price to earnings ratio.Well, the PE ratio on the S P 500 was a lot higher in November than it is today. So your theoretically buying stocks. Lower today than you were back in November. Why would you stop doing that? I get that, you know, when you put money in, it's starting to go down because the market's going down, but the contributions made in November were going down as well.So you want to continue its dollar cost averaging. It's a long term process. You know, you're not going to over contribute when the stock market goes up. That's the one thing we do know you're gonna go probably right back to the same percentage. So you wanna just be consistent in how much you're. makes sense.I mean, it's easy to think though, when you see it kind of going down. I mean, I think that's, again, something we've talked about before, but that's human nature. Mm-hmm you see it? And you're like, well, I don't. You know, I don't wanna ride this ship all the way down to, I don't know, Titanic level here. No, you're, it's like going down at you, you're driving on a road and you see that, you know, a couple miles ahead, you know, there's an accident.So you're trying to avoid that accident. You wanna avoid the traffic? So you take the side, route you office space yourself. That's true. I love that scene. I do that all the time. Every time he is so guilty of this, I hate doing that. So that leaves us to our very last IRA mistake that you can avoid. And this is on the investing.Ignoring asset location when investing so investment strategies that are inside of tax advantage accounts should be diversified, not just in what type of investments they're investing in. But also if you've got a Roth and a traditional account, Those shouldn't necessarily have the exact same asset allocation or asset mix, because there are some investment strategies that make sense in a traditional IRA.For example, things like higher yielding securities, so high yield bonds or rates where the income tax is tax ordinary income. Those are gonna be better in a traditional IRA, but if you've got a Roth IRA, you know, investing, you know, low growth bonds in that really doesn't make sense because you want that to grow as much as possible.So. So, you know, more of your growth oriented or stock investments into the Roth and having that asset allocation broken out even through the account level. And that's what a lot of people I see don't do. They just, they put together their overall asset allocation. They keep a consistent from account to account, but be strategic in which accounts get which investment mix, because that'll help you, you know, take advantage of that tax advantage nature of.So those are the top IRA mistakes to avoid. And I think ultimately what it comes down to is think smarter, think for your future, think for your beneficiaries, but always be planning ahead. I mean, you never know what's going to happen. And ultimately I think that's what we're trying to help you with. That is what we're trying to help you with.And you can go to retire, want show.com. That way you can ask any questions you can reach out to us. We'd love to help you put together a detailed retirement plan. Uh, make sure that if you're watching this on YouTube, you subscribe to the. Uh, we want you to be here, join us on this journey of building retirement paradise.And, uh, if you're listening to us on apple or Spotify also subscribe, you know, you don't get to see us doing the show, but Hey, you're listening to us. We appreciate the support there. So, uh, with that, I'm Jonathan Rankin and I'm Melissa Rankin. Thank you for.
Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC.– Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. – Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. – Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. Third party posts do not reflect the views of Theorem Wealth Management or Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and have not been reviewed for completeness and accuracy. All further communications from this representative must be sent from and received by firstname.lastname@example.org. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.
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