10 Common Roth IRA Mistakes to Avoid For Beginners

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Roth IRA accounts offer several advantages for savers, including tax-free growth and tax-free withdrawals in retirement. But it’s important to avoid common Roth IRA mistakes, which can cost you money and decrease your savings potential.

Understanding the common pitfalls below can ensure your Roth IRA works for you.

Not Contributing to Your Spouse

You could miss out on tax benefits if you’re married and don’t contribute to your spouse’s Roth IRA.

You can contribute to a spousal Roth IRA on the other’s behalf if your income covers those amounts.

Depending on your income, the maximum contribution was $6,000 each (or $7,000 if you’re both over 50) for 2022, 2021, 2020, and 2019.

Doing Rollovers Wrong

A rollover is when you withdraw money from one retirement account and deposit it into another.

You must complete the process within 60 days or face tax consequences, so understand how any rollover works before attempting it.

Not Naming Beneficiaries

To avoid Roth IRA mistakes, be sure to name your beneficiaries in the event of your death when opening a Roth IRA account.

They can access the money without probate consuming it all.

Not Investing Your Funds

Simply having an account isn’t enough – invest your funds to take advantage of compound interest and help ensure a comfortable retirement.

If you need help choosing investments, consider consulting a financial professional to avoid Roth IRA mistakes.

Neglecting to Rebalance

Rebalancing your portfolio is important because it ensures that your investments reflect the risk you’re comfortable with.

And helps mitigate any risks that come with investing in stocks, bonds, mutual funds, or other assets.

Withdrawing Inherited Roth Money

If you inherit a Roth IRA from someone, don’t make the mistake of withdrawing all of the money immediately.

Specific rules apply when accessing these funds depending on your relationship with the deceased.

All designated beneficiaries must withdraw all the money by the end of 10 years, while non-designated beneficiaries must withdraw it within five years. 

Additionally, you don’t have to pay tax if they withdraw as this is a Roth IRA, and taxes are already paid.

Taking Withdrawals Before Retirement Age

You can withdraw money from Roth IRAs without paying penalties if certain circumstances apply.

Generally speaking, early withdrawal always carries a 10% penalty fee on top of regular taxes owed for the amount withdrawn.

Not Considering a Backdoor Roth IRA

A backdoor Roth IRA is a strategy for high-income earners who may exceed the Roth contribution limits but still want to take advantage of the benefits of a Roth IRA.

If you fall into this category, consider exploring the possibility of contributing to a backdoor Roth IRA.

Not Taking Advantage of Catch-up Contributions for Seniors

If you’re 50 or older, take advantage of catch-up contributions for Roth IRAs – they can help boost your retirement savings.

Catch-up contributions allow those over 50 years old to contribute an extra $1,000 per year on top of the standard contribution limit.

This can be a powerful tool for boosting your retirement savings and ensuring a comfortable future.

Failing to Report a Roth Conversion on Your Tax Return

When you convert money from a traditional IRA to a Roth IRA, you must report the amount converted on your tax return.

Omitting this information can lead to penalties and other problems with your taxes.

Make sure that any Roth conversions are reported correctly, or seek help from a qualified accountant.

Conclusion

You can maximize your retirement savings if you avoid these Roth Ira mistakes.

Following these is a great way to get started on the right foot and secure your future financial well-being.

As always, it’s crucial to consult a financial advisor or tax professional before taking action with your Roth IRA.

Roth IRA planning can be challenging to wrap your head around, but our guide can help.

With the assistance of our experts, you’ll not only understand the process much better and know how to make years’ worth of effort pay off. Contact us here.

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