Don't Let These IRA Mistakes Derail Your Clients' Retirement Plans

What You Need to Know

IRAs hold more than $13 trillion of retirement assets.
Though these accounts are popular, misunderstanding of their evolving, complex rules are widespread.
Investment choices, treatment of inherited accounts and QCDs are minefields of mistakes.

The individual retirement account is an important planning tool for middle income and mass affluent workers in the U.S. — a fact underscored by the impressive growth such accounts have seen over the decades since their inception — but they also carry complexity that can result in big surprises and painful mistakes.

In fact, as explored in a new analysis published by Morningstar’s Christine Benz, director of personal finance and retirement planning, IRAs are subject to a “Byzantine” set of detailed and evolving tax rules that delineate the ins and outs of withdrawals, required minimum distributions, Roth conversions and rollovers.

Benz’s article points to some 20 common mistakes IRA owners can make, from delaying IRA contributions because of short-term market considerations and not paying enough attention to asset location in an IRA to failing to reinvest unneeded RMDs and not paying enough attention to IRA beneficiary designations.

As Benz explains, some of these mistakes are relatively banal and potentially fixable — if mildly annoying. Other mistakes, however, are more serious in nature and can even jeopardize otherwise well-laid retirement plans — especially those that result in the payment of heavy taxes or the treatment of IRA funds as “mad money” to be invested recklessly.

Ultimately, Benz warns, financial advisors cannot assume their clients understand all the subtitles that come along with IRA oversight, despite the investment vehicle’s popularity. A number of advisors contacted by ThinkAdvisor echoed that sentiment, and they agreed that, sometimes, the real value of an advisor comes from the ability to ensure a client avoids a bad course of action.

The Success of the IRA

To give readers a sense of what’s at stake with IRA blunders, Benz notes that assets across all IRA accounts closed in on $13 trillion in September 2023, according to data from the Investment Company Institute. In addition to direct annual contributions, much of the money in IRAs is there because it has been rolled over from the company retirement plans of former employers, Benz observes.

Separate data published recently by Fidelity, which is among nation’s largest custodians of IRAs, shows average accounts balances increased to $116,600 as of the close of 2023, marking a 6% increase over Q3 and a jump of 31% over 2013.

Also notable is that the number of Roth IRAs opened by Gen Z savers increased 50% in Q4 2023 compared to Q4 2022, Fidelity reports, with average contributions increasing 1.1%. IRA accounts owned by female Gen Zers increased by 59% over the last year.

Where Mistakes Come in

“Opening an IRA is a pretty straightforward matter,” Benz writes. “Pick a brokerage or mutual fund company, fill out some forms, and fund the account. Yet, there are plenty of places where investors can stub their toes in the process. They can make the wrong types of IRA contributions (Roth or traditional), or select suboptimal investments to put inside the tax-sheltered wrapper.”

Benz’s full list speaks to the complexity of the matter. For example, she writes that couples with a non-earning spouse tend to short-shrift retirement planning for the one who is not earning a paycheck of their own.

“That’s a missed opportunity,” Benz writes. “As long as the earning spouse has enough earned income to cover the total amount contributed for the two of them, the couple can make IRA contributions for both individuals each calendar year. Maxing out both spouses’ IRA contributions is, in fact, going to be preferable to maxing out contributions to the earning partner’s company retirement plan if it’s subpar.”

Another mistake, and one which can be particularly painful, is failing to seek advice on inherited IRAs.

“Inheriting an IRA can be a wonderful thing, but it’s not as simple as it sounds,” Benz warns. “The inheritor’s options for the IRA will vary based on his or her relationship with the deceased. If you inherit IRA assets, get some advice from a financial or tax advisor before taking action.”