20 IRA Mistakes to Avoid

From contributions to conversions to distributions, don't fall into these traps.

In this exclusive report, you’ll learn why your IRA may be your biggest retirement liability.  And, if it is, you’ll learn what you can do about it. In the next few pages you’ll also learn the real truth about IRA investing.  You’ll even discover some of the IRA tax traps that snare many people.  You may also learn how to save tens or even hundreds of thousands of dollars in taxes on your IRA over your retirement.

Taking a few minutes to read this report may be one of the smartest things you could do in planning your retirement.  It could literally affect your finances and lifestyle for many years to come. Afterwards, you are entitled to a FREE Retirement Plan analysis where I will attempt to identify areas within your retirement and savings plans where some of the strategies and techniques which I have outlined in this report could possibly be applied. This analysis is absolutely FREE and you are under no obligation to us in any way. I would, however, welcome the opportunity to assist you in the implementation of any recommendations I may have for you.  To receive this valuable analysis simply call me toll-free at 401-864-0738 and I will arrange for you to get this information as soon as possible.

So, without further ado, let’s get started.

For a vehicle with an annual contribution limit of just $6,000 ($6,500 for those over 50), investors sure have a lot riding on IRAs. Assets across all IRA accounts topped $8.8 trillion at the end of 2018, according to data from the Investment Company Institute. In addition to direct annual contributions, much of the money in IRAs is there because it has been rolled over from company retirement plans of former employers. 

Opening an IRA is a pretty straightforward matter: Pick a brokerage or mutual fund company, fill out some forms, and fund the account. Yet, there are plenty of ways investors can stub their toes along the way. They can make the wrong types of IRA contributions--Roth or Traditional--or select the wrong types of investments to put inside the tax-sheltered wrapper. And don't forget about the tax code, which delineates the ins and outs of withdrawals, required minimum distributions, conversions, and rollovers. (The SECURE Act, which was signed into law at the end of 2019, ushered in some changes related to IRAs, including the delay of required minimum distributions to age 72.) Rules as byzantine as these provide investors with plenty of opportunities to make poor decisions that can end up costing them money. 

1. Waiting Until the 11th Hour to Contribute 
Investors have until their tax-filing deadline--April 15 in 2020--to make an IRA contribution if they want it to count for the year prior. Perhaps not surprisingly, many investors take it down to the wire, according to a study from Vanguard, squeaking in their contributions right before the deadline rather than investing when they're first eligible (Jan. 1 of the year before). Those last-minute IRA contributions have less time to compound--even if it's only 15 months at a time--and that can add up to some serious money over time. Investors who don't have the full contribution amount at the start of the year are better off initiating an auto-investment plan with their IRAs, investing fixed installments per month until they hit the limit. 

2. Assuming Roth Contributions Are Always Best 
Investors have heard so much about the virtues of Roth IRAs--tax-free compounding and withdrawals, no mandatory withdrawals in retirement--that they might assume that funding a Roth instead of a Traditional IRA is always the right answer. It's not. For investors who can deduct their Traditional IRA contribution on their taxes--their income must fall below the limits--and who haven't yet saved much for retirement, a traditional deductible IRA may, in fact, be the better answer. That's because their in-retirement tax rate is apt to be lower than it is when they make the contribution, so the tax break is more valuable to them now. 

3. Thinking of It as an Either/Or Decision 
Deciding whether to contribute to a Roth or Traditional IRA depends on your tax bracket today versus where it will be in retirement. If you have no idea, it's reasonable to split the difference: Invest half of your contribution in a Traditional IRA (deductible now, taxable in retirement) and steer the other half to a Roth (aftertax dollars in, tax-free on the way out). 

4. Making a Nondeductible IRA Contribution for the Long Haul 
If you earn too much to contribute to a Roth IRA, you also earn too much to make a Traditional IRA contribution that's deductible on your tax return. The only option open to taxpayers at all income levels is a traditional nondeductible IRA. While investing in such an account and leaving it there might make sense in a few instances, investors subject themselves to two big drawbacks: required minimum distributions and ordinary income tax on withdrawals. The main virtue of a traditional nondeductible IRA, in my view, is as a conduit to a Roth IRA via the "backdoor Roth IRA maneuver." The investor simply makes a contribution to a nondeductible IRA and then converts those monies to a Roth shortly thereafter. (No income limits apply to conversions.)

5. Assuming a Backdoor Roth IRA Will Be Tax-Free 
The backdoor Roth IRA should be a tax-free maneuver in many instances. After all, the investor has contributed money that has already been taxed, and if the money is converted shortly after contribution, those assets won't have generated much in the way of gains, either. For investors with substantial Traditional IRA assets that have never been taxed, however, the maneuver may, in fact, be partially--even mostly--taxable. 

6. Assuming a Backdoor Roth IRA Is Off-Limits Because of Substantial Traditional IRA Assets 
Investors with substantial Traditional IRA assets that have never been taxed shouldn't automatically rule out the backdoor IRA idea, however. If they have the opportunity to roll their IRA into their employer's 401(k), they can effectively remove those 401(k) assets from the calculation used to determine whether their backdoor IRA is taxable.

7. Not Contributing Later in Life 
Many Americans are working longer than they used to. In recognition of that fact, the SECURE Act removed the age limits on contributions to Traditional IRAs, and Roth IRA contributions post-age-70-1/2 were already allowable. The key requirement is that the contributor or his/her spouse have enough earned income (from working, not from Social Security or their portfolios) to cover the amount of their contribution. Making Roth IRA contributions later in life can be particularly attractive for investors who don't expect to need the money in their own retirements but instead plan to pass it on to their heirs, who in turn will be able to take tax-free withdrawals. After all, Roth IRAs don't impose required minimum distributions.

9. Forgetting About Spousal Contributions 
Couples with a nonearning spouse may tend to short-shrift retirement planning for the one who's not earning a paycheck. That's a missed opportunity. As long as the earning spouse has enough earned income to cover the total amount contributed for the two of them, the couple can make IRA contributions for both individuals each calendar year. Maxing out both spouses' IRA contributions is, in fact, going to be preferable to maxing out contributions to the earning partner's company retirement plan if it's subpar. 

10. Delaying Contributions Because of Short-Term Considerations 
Investors--especially younger ones--might put off making IRA contributions, assuming they'll be tying their money up until retirement. Not necessarily. Roth IRA contributions are especially liquid and can be withdrawn at any time and for any reason without taxes or penalty, and investors may also withdraw the investment-earnings component of their IRA money without taxes and/or penalty under very specific circumstances. While it's not ideal to raid an IRA prematurely, doing so is better than not contributing in the first place. 

11. Running Afoul of the Five-Year Rule 
The ability to take tax-free withdrawals in retirement is the key advantage of having a Roth IRA. But even investors who are age 59 1/2 have to satisfy what's called the five-year rule, meaning that the assets must be in the Roth for at least five years before they begin withdrawing them. That's straightforward enough, but things get more complicated if your money is in a Roth because you converted Traditional IRA assets.

12. Thinking of an IRA As 'Mad Money'
Many investors begin saving in their 401(k)s and start to amass sizable sums there before they turn to an IRA. Thus, it might be tempting to think of the IRA as "mad money," suitable for investing in niche investments such an exchange-traded fund that is set up to capitalize on falling energy prices or Brazilian inflation-protected securities. Don't fall into that trap. While an IRA can indeed be a good way to capture asset classes that aren't offered in a company retirement plan, ongoing contributions to the account, plus investment appreciation, mean that an IRA can grow into a nice chunk of change over time. Thus, it makes sense to populate it with core investment types from the start, such as diversified stock, bond, and balanced funds, rather than dabbling in narrow investment types that don't add up to a cohesive whole. 

13. Doubling Up on Tax Shelters 
In addition to avoiding niche investments for an IRA, it also makes sense to avoid any investment type that offers tax-sheltering features itself. That's because you're usually paying some kind of a toll for those tax-saving features, but you don't need them because the money is inside of an IRA. Municipal bonds are the perfect example of what not to put in an IRA; their yields are usually lower than taxable bonds' because that income isn't subject to federal--and in some cases, state--income taxes. Master limited partnerships are also generally a good fit for a taxable account, not inside of an IRA. 

14. Not Paying Enough Attention to Asset Location 
Because an IRA gives you some form of a tax break, depending on whether you choose a Traditional or Roth IRA, it's valuable to make sure you're taking full advantage of it. Higher-yielding securities such as high-yield bonds and REITs, the income from which is taxed at investors' ordinary income tax rates, are a perfect fit for a Traditional IRA, in that those tax-deferred distributions take good advantage of what a Traditional IRA has to offer. Meanwhile, stocks, which have the best long-run appreciation potential, are a good fit for a Roth IRA, which offers tax-free withdrawals. 

15. Triggering a Tax Bill on an IRA Rollover 
A rollover from a 401(k) to an IRA--or from one IRA to another--isn't complicated, and it should be a tax-free event. However, it's possible to trigger a tax bill and an early withdrawal penalty if you take money out of the 401(k), with the intent to do a rollover, and the money doesn't make it into the new IRA within 60 days. 

16. Not Being Strategic About Required Minimum Distributions
Required minimum distributions from Traditional IRAs, which now start post-age 72, are the bane of many affluent retirees' existences, triggering tax bills they'd rather not pay. But such investors can, at a minimum, take advantage of RMD season to get their portfolios back in line, selling highly appreciated shares to meet the RMDs and reducing their portfolios' risk levels at the same time. 

17. Not Reinvesting Unneeded RMDs 
In a related vein, retired investors might worry that those distributions will take them over their planned spending rate from their portfolios. (Required minimum distributions start well below 4% but escalate well above 6% for investors who are in their 80s.) The workaround? Reinvest in a Roth IRA if you have earned income or--more likely--in tax-efficient assets inside of a taxable account. 

18. Not Taking Advantage of Qualified Charitable Distributions
RMD-subject investors also miss an opportunity if they make deductible charitable contributions rather than directing their RMDs (or a portion of them) directly to charity. That's because a qualified charitable distribution--telling your financial provider to send a portion of your RMD, up to $100,000, to the charity of your choice--reduces adjusted gross income, and that tends to have a more beneficial tax effect than taking the deduction.

19. Not Paying Enough Attention to Beneficiary Designations 
Beneficiary designations supersede expensive, carefully drawn-up estate plans, but many investors scratch them out with barely a thought or make them once but don't revisit them ever again. Be sure to keep your beneficiary designations up to date and be aware of the new rules related to RMDs for IRAs inherited by nonspouse beneficiaries.

20. Not Seeking Advice on an Inherited IRA 
Inheriting an IRA can be a wonderful thing, but it's not as simple as it sounds. The inheritor will have different options for what to do with the assets depending on his or her relationship to the deceased and can inadvertently trigger a big tax bill by tapping the IRA assets without exploring all of the options. If you inherit IRA assets, get some advice from a financial or tax advisor before taking action. 

Putting it all Together

So, you’re sitting there with an IRA account probably wondering if you’re doing the right thing to minimize the taxes that you and your heirs will pay on the account during your lifetimes. Unfortunately, there’s no cut and dried, easy answer to this question.

The Internal Revenue Code, or the rules that govern how much you’ll pay in taxes, contains over a half a billion words.  Complicated doesn’t even begin to describe it. While there have been many movements to simplify the tax code, to date, none have succeeded. .Every time our Washington politicians decide to do something to simplify the tax code or give us tax relief, we seem get a whole new set of convoluted, seemingly non-sensical rules.

To make matters worse, the Washington politicians don’t understand this whole mess we call the tax code either. After major tax packages were passed in 1993 and 1997, the politicians had to pass something called a ‘technical corrections’ act.  In short, these technical correction acts were designed to correct all the mistakes the lawmakers made when they passed the original tax legislation.

You may be wondering why the politicians who make the laws make mistakes when they revise the laws. The simple answer is many of the politicians who make the tax laws don’t understand them either.

In short, there’s no easy IRA tax savings answer that can be universally applied to all financial situations. Because the tax code is so complicated, with so many different rules to be applied, planning to keep your IRA tax bill at a minimum requires knowledge of your individual financial situation. 

However, with knowledge of your individual situation, significant tax savings are often a virtual lock. I’m so sure of it that I make the following ironclad, written guarantee:

Take me up on my offer of a free IRA Rehabilitation Analysis.  I’ll outline tax savings that you and your existing advisors didn’t know existed.

What could be more fair?

The IRA Rehabilitation Analysis will outline for you exactly how to apply the Internal Revenue Code rules to your individual situation and find tax savings for you that you and your existing advisors didn’t know existed and you owe me nothing for my time!!!

Here’s how the IRA Rehabilitation Analysis works:

1. You simply complete a short questionnaire that will give me the necessary information to conduct your IRA Rehabilitation Analysis.
2. After a brief review of this information, I’ll perform your IRA Rehabilitation Analysis.
3. This IRA Rehabilitation Analysis will then show you exactly what techniques you can use to minimize taxes on your IRA account.

If I do show you how to save taxes on your IRA account through this IRA Rehabilitation Analysis, you simply consider working with me to implement the savings that I outline in the IRA Rehabilitation Analysis.  However, there is no obligation to do so.

Now let me be clear, this IRA Rehabilitation Analysis is not a disguised sales presentation.  I give you my word in writing that is absolutely not the case. I’ll simply review your questionnaire, ask you a few questions and then do your IRA Rehabilitation Analysis.  You’ll get the facts delivered to you plain and simple, with no sales pressure and no sales hype. You just review the results of this analysis and then decide what you want to do from there, with no obligation to do anything more.

You can take the analysis I’ve prepared and do absolutely nothing with it, or, if you like, you can work with me to help you implement the savings I identify for you.  Either way you will receive valuable information and I will still donate $100 to the charity of your choice.

To get your IRA Rehabilitation Analysis just give my 24-hour, toll-free line a call at

401-864-0738.  Record your name, address, and phone number and I’ll arrange for your I                IRA Rehabilitation Analysis Questionnaire.

Answers to the most commonly asked questions about an IRA Rehabilitation Analysis

17. Is there a cost for the IRA Rehabilitation Analysis?

1. No.  The IRA Rehabilitation Analysis is yours without cost or obligation.  You will not be subjected to sales pressure or hype.  You’ll simply see which IRS rules can best be applied to your individual situation and what your total savings might be.

17. How do I know the tax savings identified by the IRA Rehabilitation Analysis are legitimate?

1. The basis for any savings outlined for you in your IRA Rehabilitation analysis will be documented for you from the appropriate section of the Internal Revenue Code. If you desire, a written opinion from one or more tax advisors/attorneys will also be provided to you.

17. How do I know that you’re legitimate?

1. Let me give you a little background about myself.

My name is Fred Sundin.  I am the President of Sundin Financial a retirement solutions company. I have been working in the financial services industry for over 30 years.  I specialize in working with clients that are retired or who are about to retire. In addition, I am a frequent speaker at many financial seminars.  Each year I speak to hundreds of attendees at the financial how to seminars that I conduct. I maintain offices in Florida and Rhode Island. In short, I have dedicated myself to becoming extremely proficient in the financial areas of retirement planning.

17. How do I know that the tax savings you identify for me won’t be taken away by some future congress?

1. As I mentioned earlier, there’s no predicting exactly what the actions of some future congress might be, however, there is precedent to suggest that any changes a future congress makes to the tax code would be grandfathered for those that are using strategies currently. In other words, precedent suggests that should a future congress change the tax code, citizens that are using strategies allowed under the current tax code would likely be allowed to continue to use them.

17. Suppose I want to get an IRA Rehabilitation Analysis, what happens next?

1. Simply call my toll free number 1-401-864-0738.  Leave your name and phone number and I’ll have someone from my office call you to arrange for your IRA Rehabilitation Analysis. We would then need to arrange for a brief interview with you personally in order for us to better understand your individual situation and individual goals.  This interview will take about ½ an hour. At the conclusion of that interview we will prepare and then deliver to you your IRA Rehabilitation Analysis, outlining your tax savings and strategies. Once you receive your IRA Rehabilitation Analysis, you can decide to simply keep it for your review or proceed and implement the savings that it outlines.  There is no obligation to do anything.

17. What do I do if I’m still working and haven’t yet ‘rolled over’ my 401(k) plan to an IRA?

1. It’s probably best to wait until you are ready to retire to get your IRA Rehabilitation Analysis, because tax laws change so frequently.  However, if you are retiring within the next year or two, you may want to order your IRA Rehabilitation Analysis questionnaire sooner.  That gives you plenty of time to understand all of your IRA options.

17. Won’t my accountant give me this information?

1. It would be extremely unlikely for you to get this type of information from your accountant or tax preparer.

First, as we’ve already discussed, the Internal Revenue Code contains over a half a billion words.  It’s virtually impossible for any professional to be able to advise you on every possible area in the tax code.  There’s just too much information.  Most tax preparers simply are not in a position to be able to advise you on this very specialized area of the tax code. Second, most tax preparers and CPA’s don’t do tax planning.  Their job is to take the information you receive at the end of the year like your W-2’s, 1099’s, and the like, and record that information properly on your tax return.  The truth is most tax preparers and CPA’s record history, they simply don’t do tax planning.  Tax planning is something you do in advance, while recording history is something you do after certain things have happened.  Ask yourself this question, when’s the last time you’ve been in your tax preparer’s office of CPA’s office in May or June to develop a tax reduction strategy?

Here are some of the things you may learn in your IRA Rehabilitation Analysis: