Reaching your 60s and facing the prospect of retirement can feel overwhelming, especially when it comes to managing your Individual Retirement Account (IRA). You’re not alone in these feelings; nearly 42% of U.S. households, equating to 55.5 million households, were using IRAs in 2023, according to the Investment Company Institute. These accounts are a vital piece of the retirement puzzle for many Americans. However, improperly managing them can lead to significant financial challenges down the road.
IRAs offer more investment choices and flexibility compared to 401(k) accounts. You have the freedom to invest as you wish and choose from many brokerage firms. While this flexibility can be an advantage, the downside is the potential for mismanagement, which might jeopardize your future finances.
Imagine finding yourself in a scenario where you’re 60, now solely responsible for handling your IRA, a role your late spouse previously filled. You’ve received a notice from your bank asking you how you’d like to allocate your IRA funds, and understandably, you might feel at a loss. But don’t worry; there are strategies to help you navigate this terrain effectively and steer clear of costly pitfalls.
One common mistake is making early withdrawals. Taking money out of your IRA before hitting age 59½ could result in a 10% penalty unless you qualify for a few specific exceptions. Moreover, withdrawing funds prematurely means you miss out on potential growth. For example, had you left $5,000 in your IRA from age 50, by the time you reach 67, assuming an 8% annual return, that sum could grow to $18,500.09.
On the other hand, when you turn 73, you must begin Required Minimum Distributions (RMDs), which are the yearly minimum withdrawals mandated by the IRS. Ignoring this requirement could lead to a 25% penalty on the amount not withdrawn, though this penalty might be reduced to 10% if corrected within two years.
Another big pitfall is investing in the wrong assets. This might include high-fee investments which can eat into your returns or simply having a poorly balanced portfolio. For instance, having a large proportion of your investments in stocks close to retirement could force you to sell at unfavorable times, locking in losses.
A handy tip to balance your portfolio is the Rule of 110. Subtract your age from 110 to determine the optimal percentage of your holdings that should be in stocks. So at age 60, you should aim to have about 50% of your investments in stocks. By avoiding such pitfalls, you can protect your retirement savings from potential financial insecurity.
Besides avoiding common mistakes, there are proactive steps you can take to make the most of your IRA. Try to maximize your contributions each year. For instance, in 2025, you can contribute up to $7,000 annually to your IRA, with those over 50 allowed an additional $1,000 catch-up contribution. Getting as close to these limits as possible will leverage compound growth for your financial future.
Choosing the right type of IRA is also crucial. A traditional IRA offers immediate tax benefits but requires taxes on withdrawals, and you’ll need to follow RMD rules. Alternatively, a Roth IRA doesn’t allow for tax-deductible contributions but offers tax-free withdrawals without RMDs. If you anticipate a higher tax bracket in retirement, a Roth IRA could be beneficial.
If you’re currently invested in a traditional IRA but worried about mandatory distributions, you might consider converting to a Roth IRA. This process involves a taxable transfer to avoid forced distributions and taxes later. However, keep in mind the five-year waiting period for withdrawing converted funds when planning your timeline.
Regularly reviewing and rebalancing your portfolio to maintain a suitable mix of assets and risk level is also vital. If this feels daunting or if you’ve questions about IRAs, consulting a financial adviser could provide the guidance you need to secure your retirement plans.
The information shared here is purely informational and should not replace professional advice. Always consult with a financial advisor for advice tailored to your personal circumstances.
