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IRA bloopers
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May 30, 2000: 8:21 a.m. ET
Avoid these costly mistakes and keep your retirement plan intact
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - Your parents taught you right. When you make a mistake you apologize. Forgive and forget.
But what do you do when you make blunders in your retirement account? You can't say 'sorry' to your IRA when you dip in too early, not save enough or mismanage the funds altogether. Your long-term savings are at risk and a comfortable retirement is that much farther off.
Financial experts say investors commit a variety of bloopers in their IRA accounts, but if you heed this advice from the pros you can keep your retirement plan intact and growing strong.
"Whoever is reading this today is going to live longer than the generation prior to them, and they may live longer than they may care to think about," said certified financial planner (CFP) Diane Rolfsmeyer in Lincoln, Neb. "So you need to carefully address your retirement account. This is not a flippant thing."
Are you contributing enough?
You opened a traditional IRA with your favorite mutual fund company and started socking away money here and there, so you're feeling pretty good about saving for your retirement days. But, are you saving enough -- the maximum amount each year you're allowed?
CFP Rolfsmeyer says many investors commit this common mistake of undercontributing.
"Often people say they forgot or didn't feel like they had the available cash," she said.
Others just aren't sure of what the contribution rules are.
Under federal law, you can contribute up to $2,000 each year into a traditional IRA plan. But that may soon change as lawmakers consider proposals to raise the savings limit to $5,000 from $2,000, the level established in 1981.
Imagine how large your retirement nest egg could grow if you set aside the full $2,000 instead of just a portion of that?
So Rolfsmeyer suggests you make a lump sum payment to your IRA early in the year if you can afford the $2,000 contribution limit. By setting aside the money in January, your contribution will grow throughout the year.
If you can't afford to make a large payment at one time, Rolfsmeyer tells clients to make regular payments each month to spread the contributions out over the year making contributing little more manageable.
Remember, under a traditional IRA:
*Earnings are tax deferred.
*Distributions are taxed as ordinary income.
*Withdrawals before 59 1/2 are subject to a 10 percent penalty, except for death, disability, college education or first-time home purchase.
*Distributions must begin after age 70 1/2.
Under a Roth IRA:
*You are still allowed to contribute even if you have an employer sponsored plan such as a 401(k).
*Distributions of earnings and principal are tax-free if you're at least 59 1/2 and the account is at least five years old.
*Early withdrawals can be made penalty free for a first-time home purchase and college education.
*You're not required to begin distributions at age 70 1/2.
Don't steal from your IRA to pay for kids' college
You and your spouse have a hefty retirement account growing after opening IRAs when you got married two decades ago. Now it's time for your Judy and Johnny to attend their favorite private colleges. Should you dip into your retirement accounts to give your children an educational opportunity of a lifetime?
Absolutely not, Rolfsmeyer says.
Firstly, you will pay through the nose in taxes if you decide to dip into your traditional IRA to pay for college. If you're younger than 59 1/2, you will pay income tax on the amount you withdraw.
"These are parents who panic and then see available funds," she said. "My key recommendation is it's a no-no. Never liquidate an IRA for a child's education."
Instead Rolfsmeyer, who focuses on college planning with her clients, suggests new parents set up a college fund when their child is born or seek out scholarships when the child approaches college age.
"The reality is there's $6 billion of unclaimed scholarship money out there every year." Rolfsmeyer said. "My personal bias is, the person who should work the hardest toward education is the student."
Mix n' match those funds
Many investors fall prey to the thinking that they've compiled a well-diversified portfolio.
"What I see is tremendous overlap in investors fund choices," said CFP Bill Howard in Memphis, Tenn. "They are hardly diversified at all. Each fund holds the same stuff."
For example, if you hold the Fidelity Aggressive Growth Fund (FDEGX) and the Fidelity Large Cap Stock Fund (FLCSX), you may be overexposed to the technology sector.
Fidelity Aggressive Growth has about 52 percent of its holdings in technology names such as Qualcomm (QCOM: Research, Estimates) and America Online (AOL: Research, Estimates) and the Fidelity Large Cap Stock has about 27 percent in tech names such as Microsoft (MSFT: Research, Estimates) and Cisco Systems (CSCO: Research, Estimates).
So if technology stocks get hammered the way they have been in recent months, both of those funds could take a potential beating and bring a large portion of your portfolio down, analysts say.
Depending on your age, your retirement plans for the future and the risk level you can tolerate, financial experts suggest you create a well-rounded portfolio touching on a variety of sectors, strategy styles such as growth and value, international exposure and fixed-income securities.
Check how your mutual funds are doing
Borrowing not allowed
You're ready to buy a house or fund that long-needed vacation to the Caribbean and you're thinking about taking a loan from your IRA. Wait!
Unlike an employer-sponsored plan such as a 401(k), an IRA doesn't allow you to 'borrow' from it, but you may take out up to $10,000 during your lifetime. You won't pay a penalty on that amount - however, you will pay taxes if you're younger than 59-1/2, says CFP Phillip Cook in Los Angeles.
Actually, you do have 60 days to replace the funds. However, most people who withdraw money from their IRA do so to pay for a long-term project such as buying a house.
"So it's easy to get tripped up," Cook said. "Get good advice from a professional." 
-- Click here to send email about this story to Staff Writer Jennifer Karchmer.
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