Roth IRA Mistakes You Must Avoid

Roth IRAs can be a powerful way to invest money for your future leaving you with millions of tax free money. But there are some common Roth IRA mistakes that happen with these accounts.

Let’s look at those common mistakes and how you can avoid them.

What are Roth IRAs?

Roth IRAs are self-directed accounts where you contribute money you’ve already paid tax on and then later you can pull out the without paying taxes. 

These accounts can help you save and invest for retirement. Who wouldn’t want to retire without a tax bill to the government?

Roth IRA Mistakes That Will Cost You Money

Here are some of the common mistakes that happen with Roth IRAs.

These mistakes can cost you hundreds of thousands of dollars. Let’s not lose money ok?

Not using a Roth IRA because you already have a 401k.

Some people avoid using a Roth IRA because they are already investing in a 401k at work.

This can be a huge mistake to ignore these retirement accounts.

If you are eligible you can invest in both a 401k and Roth IRA! In fact, you might want to invest in a Roth IRA over a 401k which is something you should evaluate for your situation.

Having a retirement plan outside of work is a great idea because it often has more flexibility, more freedom, and better investment choices.

Not actually investing the money.

A Roth IRA is just a type of account – it is NOT the actual investment.

When you put money in to your account it goes into something like a money market account – not into actual investments. You must select and purchase the investments to get the returns you want. 

Unfortunately people sometimes don’t know this but you have to choose the investments in your account and make sure your money purchases those investments.

If you do not select your investments your money may sit in a settlement account for years missing out on investment returns.

Not maxing out your account for the year.

You don’t get another chance to add money to a Roth IRA once the contribution period is over.

You can contribute up until the tax deadline of the next year to contribute for the year. Brokerages will ask you what year you want to contribute for when you are making your contribution.

Not contributing for both people if you are married.

There is no such thing as a joint Roth IRA. You must open and contribute individually.

You can both invest $6,500 per person if you qualify under the income limits. 

There are options if you don’t have an earned income but have a spouse that works. If one person doesn’t work but you file a joint return you can do a spousal Roth IRA.

Just remember that these are individual accounts owned by one person and are not joint accounts.

Taking too much risk with your investment choices.

You want your retirement accounts to grow to as large as possible but you should evaluate your risk tolerance.

You can lose money in a Roth IRA.

You can definitely lose money if you pick volatile or risky investments.

Don’t blindly follow stock tips from people you know or YouTubers just trying to make money.

With a high risk investment you can lose a lot if it goes wrong. Honestly, most people (including myself) can’t handle those investment losses well.

Research good index funds that covers a the total market with low fees and a good track record.  

Not considering your tax brackets now and in the future.

To get the benefits from the Roth you will need to know your current and future tax brackets.

Not considering your current and future tax situation means you are not planning carefully enough. Knowing these numbers will help you understand if you should actually use the Roth IRA now or not.

This will help you decide if a Roth IRA or a traditional IRA is the right choice for you right now. 

Breaking the rules on contributions.

Roth IRAs come with lots of rules.

There are rules about how much you can contribute. You can open and use multiple Roth IRAs at different brokerages but even among these you are still capped at adding the max contribution per year.

So this year it’s $6,500 so you can add $3,000 to M1 Finance and $3,500 to Vanguard but you can’t add $6,500 to each Roth IRA.

You need to know and follow these rules or you will end up with penalties and taxes to pay.

You probably shouldn’t try to go up against the government because… you will lose.

Investing before you pay off high interest debt.

Investing for the future is great but the biggest mistake is focusing on that while you still have high interest debt.

High interest debts will include things like credit cards or payday loans. These are debts that can be considered an EMERGENCY.

If you are paying 20% or more on credit cards balances you need to handle that before you start investing in a Roth IRA. 

Not keeping your beneficiaries updated.

This actually applies to all accounts, but it is a mistake to not check and update your account beneficiaries.

Reviewing and updating your account should happen yearly or after a huge life event. Make sure the money will go to the right person in case you aren’t able to use it.

Avoid MISTAKES & Keep Your MONEY

Those are the most common Roth IRA mistakes I’ve seen after talking about Roth IRAs online for a while.

Now that you know them you can avoid them!

Want to learn more about Roth IRAs? Check out our other guides:

• Roth IRA Explained (Retirement Savings 101)
• Top Things to Know Before Opening a Roth IRA
• Where To Open A Roth IRA
• 2023 Roth IRA Challenges: Invest $6,500 or $7,500