10 Costly Mistakes Too Many People Make With Their IRA Money

RETIREMENT - RETIREMENT PLANNING
Maximize your IRA gains by sidestepping these all-too-common financial slip-ups.
Updated April 11, 2024
Fact checked
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You may have an IRA as part of your retirement portfolio, but you also may be making mistakes that could cost you. 

IRAs, or individual retirement accounts, have some quirks that you may not know or may not be factoring in when considering your IRA as part of your overall financial portfolio.

So before you add more money to your IRA account, check out these 10 mistakes you could be making and stop throwing money away.

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You earn too much for a Roth IRA

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Roth IRAs, which allow you to put in post-tax dollars, have strict limits on how much you can earn each year to contribute. For example, if you’re married and filing jointly, your modified adjusted gross income can’t be over $240,000 in 2024.

It’s important to factor in how much you and your spouse earn so you know if you are below the threshold to contribute to a Roth IRA.

If you’re getting close to the limit, you’ll have to rethink your contributions and perhaps even put them somewhere else than a Roth IRA.

You contribute too much to a Roth IRA

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You may be surprised to find out that while you can still contribute to a Roth IRA based on your income, there could be limits on how much you can contribute.

Some income levels will allow you to contribute to your Roth IRA but at a reduced amount instead of the full financial contribution.

Consider checking with the IRS, a financial advisor, or a tax consultant to find out what limits may reduce your contribution.

You put off your yearly contribution

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One of the great things about investing in a traditional IRA is that you can get tax breaks each year for your contributions.

The IRS lets you contribute until tax day of the following year to claim it on your taxes. So, for your 2023 taxes, for example, you could contribute money to your IRA from January 1, 2023, until April 15, 2024.

But waiting until April 2024 to contribute money for your 2023 taxes means you left any potential interest on the table that you would have earned if you put that same amount in a year earlier.

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You forget about your spouse

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You may be contributing to an IRA with money you’re earning while working. But what about your non-working spouse?

A spouse who doesn’t work due to caretaker responsibilities, disability, or any other reason can still have a spousal IRA with money that you can put in through your work.

A spousal IRA is a great way to contribute retirement funds — and get the tax benefits of IRA contributions — even if your spouse is temporarily or permanently not working.

You assume one IRA is better than the other

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One of the great advantages of a Roth IRA is that you put in money you’ve made after you paid taxes, which allows you to withdraw the money tax-free when you retire. 

A traditional IRA, on the other hand, is funded with pre-tax dollars, so you’ll have to pay taxes when you pull the money out.

Because of the tax burden when you withdraw the cash, it may seem like a Roth IRA is a better option than a traditional IRA, but that may not be a fair assessment. A lot depends on your current tax rate and projected future tax rate.

Talk to a tax professional and see if you may be better off adding money to a traditional IRA instead.

You contribute too much

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You may have IRA contributions taken directly from your paycheck as part of an employer-sponsored plan, or perhaps you make automatic contributions each month from your wages.

It’s a great idea to set contributions up directly to your account, but be careful and keep an eye on exactly how much you are contributing.

A pay raise or taking too much out of your paycheck each month could lead to overcontributing, which can incur a financial penalty if you’re not careful.

You stop contributing at a certain age

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You may think that once you reach a certain age, you won’t be able to contribute to your IRA any longer.

But that’s not the case. A Roth IRA has no limit to what age you must be to contribute as long as you have taxable compensation. And with a traditional IRA, you can contribute until you reach age 70 1/2.

This can be a great option if you plan to work longer instead of retiring early or just want to save extra money if you’re worried about running out of funds when you retire.

You don’t consider having both types of IRAs

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You may be frustrated by trying to decide whether a Roth IRA or a traditional IRA is best for you. But you don’t have to pick one or the other. 

Instead, consider how much you want to contribute to an IRA each year and then determine if you want to split those contributions and by how much.

Splitting your investments between a Roth IRA and a traditional IRA can give you additional benefits that you might not have just with one or the other. 

For example, a Roth IRA tends to give you more flexibility for emergencies since you can withdraw your contributions without a penalty.

You withdraw money too early

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You may think the money in an IRA is yours to take as soon as you retire. But you need to be careful about when you withdraw funds, as you typically need to be at least 59 1/2 years old before withdrawing funds from a traditional IRA.

For a Roth IRA, you have the same age minimum as a traditional IRA and may need to have your Roth IRA for at least five years. 

It’s a good idea to check with the IRS or a financial advisor before you take distributions from your Roth IRA if you’re worried about qualifying, as you can incur a penalty for withdrawing funds too early.

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You skip an IRA because you have other employer funds

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Your employer may have a 401(k) plan that you participate in and may even match your contributions to help you build your retirement savings.

But you can have both 401(k) and IRAs in your retirement portfolio depending on what kind of balance of funds you want or the different advantages of each type of retirement fund.

Remember that you don’t have to restrict your retirement investments only to your employer's 401(k) account.

Bottom line

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It’s essential to get a handle on your retirement portfolio now, regardless of whether you will retire early in a few years or your target retirement date is decades from now.

Make sure you know all the rules related to different investments for your retirement and plan each one out based on any potential restrictions.

Revisit your portfolio regularly and rebalance it depending on how much risk — or lack of risk — you want as you get closer to your retirement date.

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Author Details

Jenny Cohen Jenny Cohen is a freelance writer who has covered a bit of everything, from finance to sports to her favorite TV shows. Her work has been featured in The Wall Street Journal, USA Today, and FoxSports.com.

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