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5 most dangerous IRA mistakes you can make

Aug 13, 2012, 9:17 a.m.
The worst mistakes come from the IRA tax and penalties that are assessed when they make an IRA withdraw or move that comes with serious repercussions.

Properly managing your IRA and knowing a few important facts can help you avoid costly mistakes that could substantially decrease your hard earned retirement savings. According to IRAHelp.com, some of the most costly mistakes people make concerning their IRAs actually are not investment losses. The worst mistakes come from the IRA tax and penalties that are assessed when they make an IRA withdraw or move that comes with serious repercussions.

Unfortunately, times are tough and many people have to take an early IRA withdraw just to make ends meet or move their money due to job changes. No matter what reason you are moving money, it is important that you are aware that these may be very costly moves, depending on the choices you make. Don't leave yourself vulnerable to an unnecessary IRA tax or penalty. Make yourself familiar with these rules and guidelines and you can avoid some dangerous mistakes with your IRA.

5 of the most dangerous IRA mistakes you can make

  1. The age 59 1/2 rule -- People get confused about the Age 59 1/2 Rule and think that you can withdraw money without penalty from an IRA during the year you reach the age of 1/2. This is not true; you must actually be age 59 1/2 in order to avoid paying the penalty. To be of exact age to avoid the penalty, you must count exactly 183 days from your 59th birthday to find your penalty free date.
  2. The rollover rule -- When you decide to move money from one account to another and a check is issued to you to open then new account, this is considered a rollover. Each person is allowed only one rollover per year, and more than one rollover will result in extra taxes and penalties. In addition, when you do move the money, the transfer must be completed within 60 days, or you will be required to pay all applicable taxes and a penalty, as it will be considered a withdrawal.
  3. Avoid mandatory withholding taxes -- Be sure to do a direct transfer from a company plan when possible instead of a rollover to avoid the required 20 percent tax withholding by the custodian. If it is necessary to do the rollover, you can file to get a refund on the withholding next year, but keeping your money in your account is always the best option.
  4. Plan for money owed for IRA tax on withdrawals -- You should try to set aside the money you will need to pay the tax due on the withdrawal when you do your tax returns each year. Taxes will be due on early withdrawals and on the annual mandatory withdrawals required during the year you turn age 70 1/2. Being prepared for these taxes is always a good idea.
  5. Withdraw from IRA for education -- If you need money for education it is best to move any money you have in 401(k) accounts to an IRA because there is no penalty when you withdraw from your IRA for education expenses. This is an important thing to know if you foresee educational expenses in the future.

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