IRA Planning Mistakes

  1. Making inappropriate spousal rollovers. Most IRAs list the owner's spouse as the primary beneficiary, and one of the most popular strategies for a spousal beneficiary is to simply roll that IRA into the surviving spouse's own IRA. But it can be more tax efficient for a surviving spouse to leave the IRA in the owner's name or disclaim the assets thereby allowing them to pass to the contingent beneficiary.
  2. Not taking advantage of the stretch distribution option or not establishing it properly. The "Stretch IRA" is a way for nonspouse IRA beneficiaries to maximize payouts from the IRA over their entire life expectancy. 
  3. Paying unnecessary penalties on early (pre-age 59 ½ IRA distributions.) As long as withdrawals are made in accordance with the requirements of Section 72(t) calling for "a series of substantially equal periodic payments," there is no need to pay penalties on distributions from IRAs before the owner is age 59 ½. 
  4. Assuming a nonworking spouse cannot contribute. The truth is that separate "spousal" IRAs may be established for spouses with little or no income up to the same limits as the working spouse. 
  5. Not taking advantage of increased contribution limits. In 2002, IRA contribution limits increased for the first time in 20 years. The contribution limit in 2005 is $4,000. IRA owners age 50 or older can also make an additional $500 "catch-up contribution". 
  6. Not listing beneficiaries or not updating IRA beneficiaries. One of the most common mistakes made by IRA owners is either not listing a beneficiary, not updating the beneficiary designations, or coordinating with other estate planning documents. 
  7. Placing the title of an IRA into a trust. Changing the actual ownership of the IRA to a trust causes immediate taxation. 
  8. Taking the wrong minimum distribution. New rules regarding required minimum distributions were finalized in 2002. If the IRA owner is not taking a large enough distribution he/she may be subject to a penalty tax of 50% of the amount not received as the "required minimum distribution".