10 IRA Mistakes to Avoid

Retirement planning is a critical aspect of financial management, and Individual Retirement Accounts (IRAs) are a cornerstone of this strategy. However, navigating the complexities of IRAs can be challenging, and even small mistakes can have significant consequences. Here are 10 common IRA mistakes to avoid, ensuring that your retirement savings remain on track.

1. Underestimating Retirement Needs

One of the most common mistakes is underestimating how much money you will need in retirement. A general rule of thumb is to have enough savings to cover 80% of your pre-retirement income to maintain your current lifestyle. Use a retirement calculator to help you determine the exact amount you need to save.

2. Not Knowing the Differences Between IRAs

There are several types of IRAs, including Traditional, Roth, SEP, and SIMPLE IRAs. Each has unique features, tax benefits, contribution limits, and withdrawal guidelines. Understanding these differences is crucial for making informed decisions about which type of IRA is best for your situation.

3. Contributing Too Much

If you have multiple IRAs, the contribution limits apply to the total amount, not each account. Exceeding these limits can result in a 6% excess contribution tax. For 2024, the contribution limit for Traditional and Roth IRAs is $7,000 for individuals under 50 and $8,000 for those 50 and older. For SEP IRAs, the limit is $69,000 or 25% of compensation, whichever is lower. SIMPLE IRAs have a limit of $16,000 for individuals under 50 and $19,500 for those 50 and older.

4. Not Knowing Roth Income Limits

Roth IRAs have income limits that determine eligibility. For 2024, singles and heads of household can contribute up to $146,000 and $161,000, respectively. Married couples filing jointly can contribute up to $230,000 and $240,000. If your income exceeds these limits, you may not be able to contribute to a Roth IRA.

5. Waiting Too Long to Contribute

The deadline for contributing to your IRA is tax day each year. Contributing as much as you can (up to the limit) as early as possible allows more time for compounding interest to work to grow your savings.

6. Withdrawing Too Early (or the Incorrect Amount)

Withdrawing money from your traditional IRA before age 59 1/2 generally incurs a 10% early withdrawal penalty in addition to income taxes. Roth IRAs allow for penalty-free withdrawals of contributions (but not earnings) at any time. However, earnings can be withdrawn tax-free and penalty-free if the account is at least five years old and the account holder is at least 59 1/2. Traditional IRAs have Required Minimum Distributions (RMDs) starting at age 73 (or 75 starting in 2033), which must be taken annually to avoid a 25% excise tax penalty.

7. Rollover Mistakes and Losing Money

When moving funds between IRAs, it's essential to understand the differences between transfers, rollovers, and conversions. A transfer moves funds from one account to another of the same type without taxes. A rollover moves funds from one account to a similarly registered account or to a different type of account. A conversion changes a traditional IRA to a Roth IRA, resulting in paying taxes on any untaxed amounts. Consult with a tax professional or financial planner to avoid money-moving mistakes.

8. Forgetting Your Beneficiaries

Designating beneficiaries for your IRA is crucial. Unlike a 401(k) plan, where you’re often required to name your spouse as a beneficiary, an IRA typically allows you to name anyone (unless state laws say otherwise), and you can often name more than one person.

9. Not Seeking Advice on an Inherited IRA

If you are the beneficiary of an IRA, the rules and regulations are different for inherited IRAs. Your situation will vary based on your relationship to the person who passed, their age, and other factors. Seek advice from a financial advisor to navigate these complexities.

10. Missing Out on a Backdoor Roth IRA

A backdoor Roth IRA is a strategy typically used by high-income earners who exceed Roth IRA income limits. You can create a backdoor Roth IRA by contributing funds to a traditional IRA and then rolling them over to a Roth IRA. This strategy allows you to bypass the income limits and still benefit from the tax-free withdrawals of a Roth IRA.



In conclusion, avoiding these common IRA mistakes can help you maximize your retirement savings and ensure a comfortable retirement. By understanding the nuances of IRAs and seeking professional advice when needed, you can navigate the complexities of retirement planning with confidence.