Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Here Are 6 Common Roth IRA Mistakes To Avoid

Make no mistake about it:  The Roth IRA is one of the most powerful – and most popular – retirement planning vehicles to come down the pike. 

Payouts you take from a Roth that you set up at least five years ago are completely exempt from federal income tax once you reach age 59½.  Withdrawals you take even earlier still may be tax-free, at least in part, under generous IRS “ordering rules” (although a 10% tax penalty may apply).  Finally, unlike a traditional IRA, a Roth IRA doesn’t require you to take out any money during your lifetime.

Yet despite all of these potential benefits, Roth IRAs, which have been around since 1998, still may not be used as widely as they could be, and those who have Roths may not use them to their full advantage. 

Here are six common mistakes involving Roth IRAs: 

Mistake #1: You think you’re not eligible for contributions.

There are annual income limits on eligibility for contributing to a Roth IRA that are based on your modified adjusted gross income (MAGI), or the joint MAGI of you and your spouse.  But you still may qualify for a full or partial contribution.  And even if you don’t, you could put money into a traditional IRA and then transfer that money into a Roth.  Since 2010 there have been no income limits on conversions from traditional IRAs to Roths.  You will have to pay tax on the converted amount if you got a tax deduction on your contribution to the traditional IRA.

Mistake #2: You think it’s too costly to convert to a Roth.

There is that tax price to pay for a conversion, but it might not be as steep as you think.  What’s more, a conversion doesn’t have to be an all-or-nothing proposition.  A better idea is to use tax bracket management. For instance, suppose you’re normally in the 25% bracket and you have $250,000 in a traditional IRA.  If you transferred the entire $250,000 this year, part of it would be taxed at rates well above 25%.  However, by converting only the amount that will take you to the upper threshold of the 25% bracket, you can avoid paying at a higher rate.  Then you could convert the rest in later years.

Mistake #3: You make an excess contribution to a Roth.

Watch out for the annual limits for Roth contributions.  You’re normally allowed to contribute up to $5,500 a year if you’re under age 50.  For contributors age 50 or older, the annual limit is $6,500.  But it’s easy to exceed either limit if you’re not careful, especially if you contribute at several intervals during the year.  The penalty for an excess contribution is equal to 6% of the overage and you have to pull the extra money out.  But you won’t have to pay the penalty if you fix the problem before filing your tax return.

Mistake #4: You take money out of a Roth when you don’t have to.

For traditional IRAs, you must begin taking required minimum distributions (RMDs) by April 1 of the year following the year you turn age 70½—and then continue taking at least the RMD each year for the rest of your life.  But RMDs aren’t mandatory with a Roth.  Unless you need the money, the funds can continue to grow without taxes within the account.  This can be a tax-efficient way to preserve assets for your heirs.  When the beneficiaries inherit the Roth, they will have to take RMDs each year, but they shouldn’t have to pay taxes on those withdrawals.

Mistake #5: You don’t name any beneficiaries or enough beneficiaries.

This sounds basic enough, but surprisingly it’s a real problem among Roth participants.  For starters, you should designate at least one primary beneficiary and several contingent beneficiaries who would inherit if the primary beneficiary dies before you do.  Also, when naming beneficiaries, be sure to provide complete information about each person, including name, address, date of birth, and Social Security number.  Simply listing “my daughter” or “my son” won’t suffice.

Mistake #6: You pay the Roth conversion tax out of IRA funds.

The beauty of both traditional and Roth IRAs is that the funds in your account compound without current taxes. However, using IRA assets to pay the conversion tax could be detrimental in the long run because this will reduce the amount that can accumulate inside your account.  If at all possible, dig into your wallet for the conversion tax and keep the entire nest egg working for you.

These are just some of the common mistakes we’ve seen Roth participants make.  Ask for our guidance if you have any concerns.

  • Tax Relief For Disaster-Area Losses
  • Q's And A's About Financial Aid
  • Key Components Of A Post-Divorce Estate Plan
  • Lending Money? Watch Your Tax Step
  • Watch Out For ''Grandparent Scams''
  • Tune Into The Tax Break For NUA
  • How You Can Manage Risk Aversion
  • When To Disclaim An Inherited IRA
  • IRS Reveals The ''Dirty Dozen'' Tax Scams For '17
  • Timely Tax Angles To Dividends
  • 7 Financial Steps Forward In A Second Marriage
  • IRS Applies IRA Rollover Limit To Coverdell ESAs
  • Seek The Comfort Of A Pet Trust
  • Mutual Fund Sell Downs And Other Unintended Consequenses For Investors:
  • What's The Truth About Probate?
  • Britain Votes To Leave The European Union, Surprising The World
  • Five Big Tax Penalties To Avoid At All Costs
  • 5 Reasons To Amend Your Estate Plan
  • Top Court Mandates 401(k) Fee Duty
  • Turning Up The HEET For Education
  • Saving For Private Or Prep School? A Tax-Smart Way
  • Here Are 6 Common Roth IRA Mistakes To Avoid
  • IRS Zeroes In On Dirty Tax Scams In 2015
  • Combine Investment And Tax Benefits In 529 Plans
  • Want To Get Your Business Noticed By The News Media?
  • Learn The Ins And Outs Of Education Tax Breaks
  • Locked Out Of A Roth IRA? Go In Through Back Door
  • How To Manage Your Tax Brackets Now And Later
  • Fill Up Tax Brackets To The Brim
  • Why Roth IRAs Are Still Red-Hot
  • Want To Get A Copy Of Your Credit Report? It's Free!
  • 5 Tips That Can Help Get Your Kids Into College
  • Reminders On Your Beneficiary Choices
  • Enter The Five Dimensions Of Federal Income Taxes
  • How Did The Federal Government Shutdown Affect The Economy?
  • SLATs Fit Through The Cracks In Estate Plans
  • The Bypass Trust: Not Pronounced Dead Quite Yet
  • When Do You Need An Appraisal?
  • 7 Major Tax Changes In The Fiscal Cliff Law
  • What Is Safe For You To Put Into A Safe Deposit Box?
  • Dig Deep Into ''Treasure Assets''
  • It's A Question Of Proper Balance
  • Tough Talk On Hardship Withdrawals
  • Stock Option Rules After Job Loss
  • Don't Put Mid-Year Moves On Hold
  • Which Retirement Funds Should You Withdraw First?
  • Is The Federal Reserve Risking Hyperinflation?
  • A Common Error In Powers Of Attorney
  • When Is Life Insurance A Sensible Solution?
  • 5 Excellent Tax Blogs And Websites
  • Knowhow On Year-End Tax Planning
  • A Once-In-A-Lifetime Estate Tax Choice
  • Set Up Your Trust To ''Fail'' On Purpose
  • Charitable Rollovers: There's Still Time
  • 7 Reasons To Update Your Financial Plan
  • Website Matches Volunteers With Non-Profits In Need
  • Trust Protector Is Useful, But Little-Known Solution
  • Tax Tips When You Acquire Software
  • Not All ETFs Are Tax-Efficient Anymore
  • The Delicate Dynamics Of China-U.S. Economic Policy
  • U.S. Government Bailouts Have A Mixed Record
  • Planning Your Retirement Using Stock Options
  • What Historically Follows Severe Economic Crises
  • Despite The Global Crisis, The World Is Getting Better
  • Will The New Silicon Valley Transform The Economy?
  • What A Difference A Year Makes In Ten-Year Returns
  • Now's A Time To Recall Financial Planning Basics
  • The Importance Of Year-Round Tax Planning
  • Federal Estate Tax Exemption... Going Up!
  • Court Ruling Limits Fee Deductions For Trusts
  • Not All Variable Annuities Have High Fees
  • Are You Putting Too Much Money Back Into Your Business
  • Credit Crunch Places Focus On Rating Agencies
  • Find An Expert In Almost Anything On The Internet
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Succession Planning For Solo Businesses
  • Energy Systems Scale and Timeline
  • The Oil Patch Profit Squeeze
  • Free Credit Reports Available Online
  • Don't Forget About Roth 401(k)
  • Understanding the Importance of a Fiduciary Standard
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Timber As A Liquid Investment
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Ethanol: Salvation or Panacea?
  • Timber Facts
  • Bank Loan Funds - A Primer
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • Too Many ''Phish'' In The Sea
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • The Case For Industrial Metals
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft: Help Is On Its Way
  • Identity Theft: Tips to Protect Yourself
  • Identity Theft: What Documents Should You Shred or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • REITs: A Great Diversification Investment
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Understanding Deflation
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Evaluating The Quality Of A Company's Earnings
  • Yesterday's Great Companies
  • 2001 Tax Relief Act Changes Education Planning
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Custodial Accounts: One Way To Make Gifts To Children
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning
  • Is Your 401(k) Plan A Failure?

  • ©2018 Legend Financial Advisors, Inc.®. All rights reserved.