4 mistakes clients make with Roth IRAs and their estate in California

On Behalf of | May 19, 2022 | Firm News

Roth IRA is one of the most preferred methods used by people in California as a saving and investment option or to leave their inheritance to their heirs. This popularity is due to its tax-free status. While it sounds good, people still make costly mistakes when contributing to Roth IRAs that affect them and their loved ones. Here are the four most common ones.

1. Contributing when you don’t qualify

For the year 2022, you can only make contributions if your Modified Adjusted Gross Income (MAGI) is $144,000 or less if you are single or $214,000 or lower if you are married and filing jointly. If you decide to make contributions when you don’t qualify, the IRA will consider the amount in your account as an excess contribution. And thus, they will penalize you by charging a 6% tax every year on that amount.

2. Not naming a beneficiary

One of the most costly estate planning mistakes you could ever make is not naming a beneficiary. This is because you will force your heirs to go through the expensive and time-consuming process known as probate. In addition, when you die, your Roth IRA will go to your estate – which could mean higher taxes for your heirs. And if it is large enough, it could also be subject to federal estate taxes.

3. Not withdrawing funds according to the rules

There are specific rules for withdrawing funds from a Roth IRA, and if you don’t follow them, you could be subject to taxes and penalties. For example, you can’t withdraw your contributions until you’ve held the account for at least five years, and you can only make withdrawals after age 59 ½.

4. Not diversifying your investments

Like any other investment account, it’s essential to diversify your money in a Roth IRA. This means having different asset types, such as stocks, bonds, and cash. Not diversifying your investments leaves you more vulnerable to market fluctuations and could mean missing out on potential earnings.

Roth IRA is a great way to save for retirement or your heirs. Ensure to avoid the above mistakes to make yours useful for you.