If you’re the type of person, who likes to do things yourself, beware: tax law is not the most forgiving institution in the world, and if you make a mistake, it could be dire. While professionals can help you prepare your portfolio, or help mitigate the damage done if you mess up your portfolio if you’re planning to do it yourself, you have to be careful, or else things might not turn out well.
Let’s say you own an IRA, and you want to covert $20,000 of it into a Roth account. First, you go online and punch in the numbers. But, let’s say you accidentally type in a few extra zeros or miss a decimal point somewhere, and now you’re requesting a 2 million dollar conversion. Because of the Tax Cuts and Jobs Act, once this transaction goes through, there is no reversing it.
If an advisor made this error, it could be fixable, as it was not your fault. If you sign off on an error while preparing yourself, that’s on you though. You could appeal to the IRS, but they are notoriously fickle about what rules they bend if a mistake has been made, and even then, it could be costly (in both time and money) to try and correct it.
If you have talked to a financial advisor, they would’ve told you this: don’t do Roth conversions by yourself, they can not be redone if an error is made.
Or let me give you another example:
Let’s say you are enrolled in the Thrift Savings Plan. You want to take some of that money and reinvest it in an IRA. You do it yourself, paperwork and all, and in the process, you make a mistake on the forms and have failed to try and correct it with the deciding institutions.
Let’s say the box you check on those forms was for full distribution instead of just moving the money directly into that IRA. You will be required to pay taxes on that money at that time, whether you intended to distribute it or not. And it is often a losing court battle, as the TSP is just doing what you requested them to do, in writing.
If this egregious mistake was made, you should seek help from a professional immediately. Doing anything else yourself could result in more errors and more penalties. An advisor would know to take that money that was sent to you and stick it immediately into your IRA, making up for the money you had to pay in taxes by moving around other funds and investments you may have.
If you work with professionals financial advisors, you wouldn’t be liable for any of these mistakes. The best course of action is to use professionals from the get-go and avoid any headaches you may suffer as a result of ignorance or negligence.