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 Individual Retirement Account, or IRA, can help avoid some missteps. There are many intricacies to IRAs, so consider the below as a starting point. As always, consult with a tax professional if you have questions about your specific financial situation.
Read more: Is a traditional or Roth IRA right for you?
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 pre-retirement income to maintain your current lifestyle.
Need help with the math? Check out our retirement calculator.
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 what IRA may be best for you:
IRA account type | Features |
|---|---|
Traditional | - Contributions may be tax deductible (income limits exist) - Owe income tax on contributions and earnings when you make a withdrawal |
Roth | - Contributions are taxed (income limits exist) - Distributions are tax-free in retirement - Can withdraw contributions without penalty |
SEP | - For business owners or self-employed workers - Similar to a traditional IRA |
SIMPLE | - For companies with 100 employees or fewer - Contributions are tax deductible Employers can make contributions or match workers’ contributions up to 3% |
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.
IRA account type* | Under 50 | Over 50 |
|---|---|---|
Traditional and Roth | $7,500 | $8,600 |
SEP IRA** | $72,000 or 25% of compensation (whichever is lower) | Same as under 50 |
SIMPLE*** | $17,000 | $21,000 |
* For 2026
** Contributions made by employer, not individual
*** May be greater if the business has 25 or fewer employees or if the account holder is age 60-63
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:
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)
Converting your entire traditional IRA to a Roth IRA
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.
