roth ira mistakes

Are You Making These Common Roth IRA Mistakes?


The Roth IRA is a powerful investment tool that offers tax advantages and the potential for long-term wealth accumulation. More people are becoming aware of the importance and advantages of contributing to a Roth IRA. However, like any financial strategy, it’s essential to navigate the landscape carefully to maximize its benefits. In this article, I will share seven common Roth IRA mistakes and provide insights on how to avoid them, to help you make the most of this valuable retirement planning option.

Mistake One: Not investing your Roth contributions.

I often see people opening a Roth IRA, contributing to it, and then not doing anything with that money. Many investors believe that a Roth IRA is an investment when it’s simply an account. They let it sit in a money market account, which is the default setting in most brokerage firms. Right now, money market funds give a decent yield, but this will likely go down after the Federal Reserve starts cutting interest rates.

So, it’s almost like going hiking and not taking a few extra steps to see the panoramic view, you know what I mean? So, you’re almost there, you want to take that extra step, and make sure you invest your Roth contributions.

If you contribute to a Roth IRA without investing those contributions, it could just be sitting as cash!

Mistake Two: Opening a Roth with a bank.

I don’t have anything against banks. I use a bank. The downside of opening a Roth IRA with a bank is that it most likely is going to sit in a savings account or a Certificate of Deposit (CD). Just as with mistake number one above, this one will also not have very high earnings. If your objective is to grow your Roth, you can’t take advantage of tax-free earnings when you don’t have any earnings.


Mistake Three: Contributing to a Roth IRA even though you’re no longer eligible.

What typically happens is that you were eligible at some point in the past, and contributing to your Roth has become a habit for you. But, you’re getting promotions in your company, your salary increases over time, and you may become no longer eligible without even realizing it. So, you want to make sure that you’re eligible before you make that contribution.

For 2024, if you want to contribute the full $7,000, if you’re filing single, your modified adjusted gross income (MAGI) needs to be less than $146,000. If you’re married filing jointly, your MAGI combined needs to be less than $230,000. You can look up the maximum income limits each year, as they do change.

If you happen to contribute more than the allowable limit to your Roth IRA, you have until the tax filing deadline, including extensions, to rectify the mistake. This involves withdrawing the excess contributions along with any income they may have generated. Failure to address the overcontribution promptly leads to a 6% annual tax on the excess amount for each year it stays in your account. It’s essential to take timely action to avoid potential tax implications and ensure compliance with Roth IRA regulations.

Before making contributions, check the income limits and explore alternative strategies, such as a backdoor Roth IRA conversion, if you exceed the threshold.

>> Want to know if you can make a Backdoor Roth IRA contribution? Find out here!

Mistake Four: Withdrawing your money before retirement

In most cases, Roth IRA contributions can be withdrawn anytime without incurring taxes or penalties. However, to enjoy tax-free withdrawal of any earnings, you must be 59½ or older and have maintained your account for at least five years. If you withdraw earnings before meeting these criteria, you may face a 10% penalty along with ordinary income tax on the earnings.

However, you may qualify for an exception to the rules if the funds are used for a first-time home purchase (with a lifetime maximum of $10,000), adoption expenses, or in the case of disability.

While early withdrawals are feasible under certain circumstances, it’s generally advisable to let your Roth IRA assets grow undisturbed for as long as possible. This approach allows your money more time to potentially benefit from tax-free growth. 


Mistake Five: Overlooking the benefits of a spousal IRA

Many individuals are unaware of the valuable opportunity afforded by a spousal IRA. Typically, you need earned income to open and fund an IRA. However, the IRS makes an exception for spouses who do not work outside the home. If you meet the income requirements, can cover contributions for both you and your spouse, and file a joint tax return, each of you can have your own IRA.

By taking advantage of spousal IRAs, couples can maximize their retirement savings potential and enhance their long-term financial security.

Mistake Six: Failing to withdraw inherited Roth IRA money before the withdrawal deadline

The rules for withdrawing an inherited Roth IRA recently changed. Any beneficiary other than the spouse must now withdraw 100% of the funds within 10 years of the owner’s death.

The rules are slightly different if the beneficiary is a surviving spouse of the account owner. A surviving spouse has the option of postponing their RMDs until the year that the original owner would have started taking distributions.

Failing to adhere to the RMD rules can result in a substantial tax penalty, reaching up to 25% of the required amount. However, if the error is rectified promptly, a timely correction can reduce the penalty to 10%.

Mistake Seven: Forgetting to add your beneficiaries

Another common Roth IRA mistake is forgetting to designate primary and contingent beneficiaries for their accounts.

Assigning both primary and contingent beneficiaries is crucial for your IRA accounts. Without designated beneficiaries, the distribution of your assets may be subject to probate if something were to happen to you. Probate can lead to prolonged delays, increased costs, and unnecessary inconveniences for your loved ones.

It’s not only about naming beneficiaries initially; regular reviews are equally important. Life circumstances can change, and it’s essential to update your beneficiaries accordingly.

Don’t make these Roth IRA mistakes!

Avoiding these common Roth IRA mistakes is crucial for building a secure financial future and optimizing your retirement savings. By staying informed, making regular contributions, diversifying investments, and strategically navigating the tax implications, you can harness the full potential of your Roth IRA for a comfortable and financially sound retirement.

If you’re uncertain about your Roth IRA strategy, consulting with a financial advisor can provide personalized guidance tailored to your unique situation. If you are interested in a comprehensive financial plan, schedule a free discovery consultation with one of our financial planners here.

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.


District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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