10 common IRA mistakes to avoid

10 common IRA mistakes to avoid

An individual retirement account, or IRA, is a popular retirement savings tool because of its tax advantages and investment flexibility. But to reap the rewards, it’s important to familiarize yourself with common IRA mistakes and understand how to avoid them.

It’s never too soon — or too late — to get familiar with the retirement savings tools available. Knowing the basics of your IRA can help avoid some missteps. There are many intricacies to IRAs, so consider the following from Ally Financial as a starting point. As always, consult with a tax professional if you have questions about your specific financial situation.

1. Underestimating your retirement fund needs

While retirement planning isn’t a one-size-fits-all process, a general rule is to have enough to cover 70% to 90% of your preretirement income to maintain your current lifestyle.

Tip: Use a retirement calculator to help with the math.

2. Not knowing the differences between IRAs

Understanding traditional, Roth, SEP, and simple IRAs’ respective tax benefits, contribution limits, and withdrawal guidelines can help you understand which IRA may be best for you:

3. Contributing too much

It’s easy to assume that contribution limits apply to each separate IRA account you have. But they actually apply to the total amount. Exceed the limit, and you’ll incur a 6% excess contribution tax.

** Contributions made by the employer, not an individual

*** May be greater if the business has 25 or fewer employees or if the account holder is aged 60 to 63

4. Not knowing Roth income limits

If you fall between these 2026 adjusted gross income (AGI) limits, you can put a reduced amount in a Roth IRA:

• Singles and heads of household: $153,000 and $168,000
• Married couples filing jointly: $242,000 and $252,000
• Married individuals filing a separate return: $10,000

If you exceed the upper limit, you can’t contribute to a Roth IRA.

5. Waiting too long to contribute

The deadline for contributing to your IRA is Tax Day each year. Maxing out your contributions as early as possible allows more time for compounding interest to work to grow your savings.

6. Withdrawing too early (or the incorrect amount)

If you withdraw money from your traditional IRA before age 59 1/2, you’ll generally pay income taxes and a hefty 10% early withdrawal penalty. With Roth IRAs, you’ll only pay these early withdrawal costs on your earnings on the amounts contributed to the Roth IRA.

Roth IRAs also require five years to pass from the beginning of the tax year of your first contribution for earnings to be withdrawn tax-free, even if you’re 59 1/2.

Traditional IRAs have a required minimum distribution, or RMD, later in retirement. Failure to withdraw your RMD annually may result in paying the original taxes owed plus a 25% excise tax penalty.

The deadline for contributing to your IRA is Tax Day each year.

7. Rollover mistakes and losing money

When it comes to your IRAs, you can:

• Transfer funds, moving them from one account to another account of the same type without taxes
• Rollover funds from one account to a similarly registered account or to a different type of account (such as a 401(k) to a traditional IRA)
• Conduct a conversion to change a traditional IRA to a Roth IRA, which results in paying taxes on any untaxed amounts

Consulting with a tax professional or financial planner can help you avoid money-moving mistakes.

8. Forgetting to add your beneficiaries

Just like with your other assets, it’s important to designate who will receive your IRA when you pass away. 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, know that 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.

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 in one of three ways:

1. Contributing funds to a traditional IRA, then rolling them over to a Roth IRA (there is no cap on how much you can roll over at one time, although the IRS has more rules that apply)
2. Converting your entire traditional IRA to a Roth IRA
3. Rolling over a 401(k) account to a Roth IRA (if your employer allows it)

You’ll still need to pay taxes on any money in your traditional IRA that hasn’t been taxed.

Avoid common IRA issues

As you move toward retirement, an IRA can make significant returns through compound interest, investment appreciation, and dividends. Strengthening your knowledge will help you become a savvy saver from the moment you open your IRA.

This story was produced by Ally Financial and reviewed and distributed by Stacker.