2 Expensive Mistakes People Make With Their IRA Savings, According to Financial PlannersAug 6, 2021, 11:32 AM
1. They don't choose the right type of IRA
Roth and traditional IRAs are very different — but there's no one option that's right for everyone or every situation.
The big difference between the two types comes down to when you pay taxes: either now or in retirement. Roth IRAs have tax savings come later, where taxes are paid now and the money comes out tax-free later. For those who have years for their contributions to grow, a Roth IRA can lead to big tax savings later. Traditional IRAs, however, are tax-free now, with the taxes paid later in retirement.
"It's not really just what you earn in investing, it's also what you keep," said wealth manager and financial planner Alex Klingelhoeffer of Exencial Wealth Advisors. "You want to make sure you have not just the right eggs in your basket, but also the right basket to carry your eggs."
By choosing the right type, you'll be better able to take advantage of the tax breaks these accounts offer.
2. The money in the account isn't invested correctly
No matter what type of IRA you're saving in, the money you're contributing needs to be invested to grow. Money sitting in cash is missing out on growth and compounding interest.
Firstly, it needs to be invested. Former financial advisor and founder of Building Bread Kevin Matthews said he once had a client keeping cash in a retirement account for decades.
"That is almost like putting food into the microwave, or putting food into the oven, and not actually turning it on," he previously told Insider. You can put money into it, but you want to make sure that it is invested in the funds that fit for you to actually grow the money."
When your money is invested, it also needs to be invested correctly. It needs to have the right amount of risk for your retirement timing, and a lot of that comes down to how aggressively or conservatively that money is invested, Klingelhoeffer said.
"I'll see folks who've come to me in their thirties and they say, 'okay, I'm risk-averse. That's fine as far as basing your investment on a personality, but it doesn't mathematically give you the growth you need over time to accomplish a lot of your goals," Klingelhoeffer said.
By having your money invested correctly, you can make sure not only that it's growing, but that it will grow the right amount for your goals.