Chris Hopkins

Last week we reviewed the essential features and benefits of both traditional and Roth IRAs. This week, let's look at some errors often made by IRA holders and how to avoid them.

n Fun with beneficiaries. Many assets are distributed at death according to the decedent's will, and must therefore pass through the probate process. Conversely, traditional and Roth IRA accounts (and certain joint assets if properly titled) bypass probate and move directly into the hands of the intended beneficiaries, provided they are properly specified. That last phrase is key; you must specifically name your intended beneficiaries, otherwise the assets will become part of your regular estate, requiring probate and forfeiting the unique tax benefits attendant to an IRA.

You may name as many primary beneficiaries as you like, in any proportion. You can also designate additional recipients in the event that beneficiaries predecease you (called contingent beneficiaries). It is essential that you review your accounts periodically to verify correct beneficiary information and make any necessary changes as circumstances dictate. One common and possibly consequential oversight is forgetting to remove a former spouse following a divorce.

n Avoiding rollover accidents. Transferring assets from an employer's plan into your IRA is a significant event that requires attention to detail. In most cases, the custodian of the employer plan can directly roll your funds into your IRA account, avoiding tax withholding and preserving the tax-preferred status of your money. If, however, you receive a check, you must act quickly and carefully to keep your rollover tax-free.

You have 60 days from the date on the check to redeposit the funds into another retirement account. If you miss the window, the full amount will be considered a distribution, subject to taxation at your highest tax rate. You may also be subject to the early withdrawal penalty of 10 percent if you are younger than 59 1/2. This mistake is made surprisingly often, and the IRS is most unforgiving in this regard.

You may also be subject to mandatory tax withholding if you receive a check. This levy may be recouped on next year's tax return, but you must deposit the amount withheld into your IRA out of your own pocket to complete the full rollover within the 60-day window.

Rollovers may only be made into Roth IRAs if the employer's plan was also a Roth account (consisting of after-tax contributions).

Take your required minimum distribution. Congratulations on reaching age 70 1/2; now hand it over. Traditional IRAs require that you begin depleting your account in the year during which you attain that age. Called your required minimum distribution, it must be recomputed and withdrawn each year thereafter. And the price of failure is punitive: 50 percent of the required amount not distributed. Your bank or broker can help calculate the amount, but it is your responsibility to initiate the transaction. Roth accounts are exempt from any RMDs.

As always, consult with your tax adviser if you have any questions. The cost of IRA mistakes can be high, and a little extra advice is well worth the effort.

Christopher A. Hopkins, CFA, is a vice president for Barnett & Co. Investment Advisors.