An individual retirement account (IRA) can be an excellent investment vehicle to build your retirement nest egg.
Correlating with this, contributing to an IRA without actually knowing how it works or what kind of advantages it offers can cause you to make mistakes that could prove to be costly down the line.
In this post, we will take a look at four common investing mistakes you should avoid in order to get the most out of your IRA.
Not choosing the right kind of IRA
If your post-retirement tax rate is likely to be higher than your current tax rate, it makes sense for you to open a Roth IRA. As it is funded with your after-tax dollars, you do not pay taxes when you start making withdrawals.
If, on the other hand, your post-retirement tax rate is likely to be lower than your current tax rate (which is the case for most people), it makes sense for you to open a traditional IRA, as the tax break now you get now can help you save and invest more money today.
If you are unsure about your post-retirement tax rate, it might be an good idea to open a traditional as well as Roth IRA and to contribute to both accounts.
Not maxing out your contributions
You can contribute several thousand dollars a year to an IRA and more if you are 50 or older.
Maxing out your contributions is particularly important if you have a Roth account, as it does not have any withdrawal requirements and you can keep your funds in your account for as long as you want and let it grow tax-free.
Not taking advantage of spousal contributions
If you have a non-earning spouse, you can contribute to their traditional or Roth IRA on their behalf. If your spouse is 50 or older, you can contribute more.
If both of you are 50 or older, your total contribution can be a substantial amount, helping you build a hefty piggy bank to live on in retirement. There’s no reason for you to not take advantage of this opportunity.
Not investing the money properly
Contributing money to an IRA is only one part of retirement planning. In order to build a sufficiently large retirement piggy bank, you need to invest your money properly.
In order to acquire the best possible returns, it’s prudent to invest in index funds or low-cost, index-style exchange traded funds.
Remember, being overexposed to equities can be a bad idea if you are closer to retirement.
A balance of stocks and bonds can lower the overall volatility of your retirement portfolio, and that balance in most cases should lean toward bonds as you get older.
