5 Real-Life Financial Planning Mistakes People Make

Learning how to manage and plan your finances is an important step in making sure you are financially stable now and well into your retirement. However, there can be a steep learning curve for people who haven’t had strong financial literacy or who wing it as they go.

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Some financial planning mistakes can be catastrophic, while others are easily correctable. Christopher Stroup, CFP and owner of Silicon Beach Financial , explained some of the more common “real-life” financial planning mistakes he sees.

Find out if you are making any of these errors and get professional help to fix or avoid them in the future .

Money mistakes the super wealthy never make - that you might be doing now.

Making Ineligible Contributions to a Roth IRA or Traditional IRA

IRAs are tax-advantaged retirement accounts that help you prepare for retirement and provide tax benefits as well. However, in order to make contributions to a traditional IRA or Roth IRA, you must have earned income for the tax year that the contribution is made, Stroup said.

“According to the IRS, earned income includes wages, salary, tips, bonuses or professional fees. I once had a client that was living off their portfolio assets still making contributions to their Roth IRA, which turned out to be problematic because they didn’t meet the earned income requirement to be eligible for such contributions,” Stroup explained.

It’s important to know that portfolio income, such as dividends or interest, do not satisfy the earned income requirement for IRA contributions.

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Paying Unnecessary Underpayment Tax Penalties

It’s fair to say that no one wants to pay more than what’s required in taxes; however, for those that greatly underpay their tax liability in any given year, additional penalties and fees can apply.

“I once had a client that was subject to several thousand dollars of underpayment penalties levied by the IRS,” Stroup said. “The reality is that these fees are totally avoidable with proper planning.”

For example, he said, individuals whose adjusted gross income (AGI) is $150,000 or less must pay the lesser of 90% of the current year’s tax or 100% of last year’s tax to avoid an underpayment penalty. For those with an AGI that exceeds $150,000, you must pay the lesser of 90% of the tax due for the current year or 110% of the tax on the individual’s returns for the prior tax year.

“Proper coordination with your CPA can help you meet these safe harbor conditions by combining estimated and withholding taxes,” Stroup said.

Not Updating Marital Status

Stroup works with a lot of couples who elect to remain unmarried, which presents different financial planning challenges when compared to those who do marry. Neither option is right or wrong, he said, as deciding to marry is a deeply personal decision to be made by each couple; however, it’s important to understand that many financial planning factors, such as your tax-filing status or eligibility for retirement accounts, hinges on your marital status.

“I once had an unmarried couple elect to get married via a no-frills civil marriage ceremony; however, they forgot to tell me. Many months went by, including the tax-filing deadline, until it came out,” he said. “The fact that they had married changed their filing status, which meant that contributions made to retirement accounts, namely their Roth IRAs, were ineligible. Corrective action needed to be taken in order to avoid penalties and fees.”

This example highlights why it can be so important to keep your financial team informed of major life changes as nearly all decisions you make affect your finances in some way.

Failing To Update an Estate Plan After a Major Life Change

Estate plans require beneficiary designations so it’s legally clear who you want to inherit your assets after you pass. If you get divorced, have a child, buy a home, receive a large windfall and other major life events that affect your finances, but forget to change your designations, you could end up leaving money to someone you don’t intend.

“I once had a new client that was previously divorced. After some digging, it became clear that he had never taken the steps after the separation to update his estate documents or legacy plans. Had it not been caught and corrected, all of his assets would have flowed to the ex-spouse,” Stroup said.

It’s critical to revisit your estate plan whenever there is a major life event, Stroup urged.

Insufficient Documentation of Home Improvement Expenditures

Proper documentation of material improvements to your home can save you money should you elect to sell the home in the future, Stroup said.

These costs can be added to the cost basis of the original home purchase, which can lower the gain recognized on the sale of your home.

“I once had a client execute a large renovation of their main residence only to sell the home shortly thereafter. Unfortunately, they had poor record-keeping of the costs associated with the improvements, which ultimately meant they paid more in tax on the sale of their home than what was probably necessary,” Stroup said.

The best way to avoid this is to keep track of material improvements to your home and share the invoices with your CPA so that they can properly incorporate these items when filing your taxes.

In all these cases, having a financial planner or accountant on board can prevent you from making any major errors that come back to bite you later.

This article originally appeared on GOBankingRates.com : 5 Real-Life Financial Planning Mistakes People Make