When most people think of investing mistakes, they think of buying or selling the wrong stocks, but these five investing mistakes can cost you even more:
1. Contributing Too Much to an IRA
This one can get expensive if you don’t fix it right away. The IRS sets a maximum allowable contribution to IRAs each year. This is a total limit for all IRA accounts you own, and it applies even if you do not deduct your contributions. Also, the ability to contribute to a Roth IRA phases out at higher income levels. If you get the calculation wrong, you may contribute more than you are allowed. There is a 6% excise tax annually for excess contributions. To fix the error, you must withdrawal the excess contribution, and all earnings from it. The earnings may be considered an early withdrawal and subject to a 10% penalty if you are under 59 ½. You have until your return is due, including any extensions, to remove the excess contributions without penalty.
2. Insider Trading
Insider trading is buying or selling stock based on information that is not public. A recent study by the IRRC Institute suggests insider trading may be more common than most people think, with approximately 25% of all studied mergers having “abnormal” trading volumes. Whether you see something you weren’t supposed to, or overhear information, if you have reason to suspect it isn’t public, that may be insider trading. Investors convicted of insider trading can face substantial fines and jail time.
3. Wash Sales
One way to reduce taxes is to sell positions at a loss and deduct them against your gains. This is a valuable, and legal, way to manage your taxes, and Folio’s Tax Football makes it easy. However, for the deduction to count, you must not repurchase the same, or substantially similar, security within 30 days. For example, selling IBM stock and the purchasing IBM options is not allowed. However, selling one technology mutual fund and buying a different technology mutual fund would be allowed. A wash sale disallows your deduction, which may subject you to penalties and interest for underpayment.
4. Failure to Disclose International Accounts
There are plenty of reasons you might have an international account, but you are not allowed to use such accounts to avoid taxes. However, international accounts may not automatically generate the kind of tax reporting documents that U.S.-based accounts do. Penalties for failing to disclose offshore accounts start at $10,000.
5. Failure to Report Income
Usually, all brokerages you have an account with will report your earnings on a 1099 Form. A copy of those forms also goes to the IRS. Lose one, or forget about one, and your tax return won’t match the IRS. One common mistake happens when people sign up for electronic delivery of tax documents and then forget to go retrieve the tax forms. Be sure you report the information from all of your accounts.
Keeping good records and carefully reviewing your tax returns is the first step in avoiding many mistakes. Always understand the legal and tax consequences of any investment decisions you make.