In this article, I will be sharing three common mistakes people often make when contributing to a Roth IRA. I am so glad that more and more people are becoming aware of the importance and advantage of contributing to a Roth IRA. They are a great savings tool that can potentially double, triple, or quadruple our retirement savings over time, in a tax-free manner. But over the years, I’ve often seen people make these three common mistakes. As Warren Buffett said, “It’s good to learn from your mistakes. It’s even better to learn from other people’s mistakes.” So, let me share them with you.
Mistake One: Not investing your Roth contributions.
So often when we open a Roth IRAs, if we don’t do anything with that contribution, it’s just going to sit in a money market account, which is the default setting in most brokerage firms. It’s probably going to only give you approximately 0.22% interest per year. So, it’s almost like going hiking and not taking the 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.
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 really take advantage of tax-free earnings when you don’t really have many 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 actually become no longer eligible without even realizing it. So, you want to make sure that you’re eligible before you make that contribution. For 2022, if you want to contribute the full $6,000, if you’re filing single, your modified adjusted gross income (MAGI) needs to be less than $144,000. If you’re married filing jointly, your MAGI combined needs to be less than $214,000. You can look up the maximum income limits each year, as they do change.
So that’s it! I hope this article helps you avoid those three common Roth IRA mistakes. If you’re contributing to a Roth IRA, make sure you’re eligible, and you want to make that final step and invest it, hopefully in a diversified manner. If you have questions or would like more information you can schedule a discovery call with one of our financial planners here.
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.