Individual Retirement Accounts (IRAs) are essential tools for retirement planning, offering tax advantages that can significantly boost your long-term savings. Yet despite their potential, IRAs are frequently misused. From missing key deadlines to making poor investment choices, these errors can lead to tax penalties, reduced growth, and a less secure retirement. In this guide, we’ll delve into 15 common IRA mistakes—some widely known and others rarely discussed—and offer strategies to avoid them. Whether you’re just starting to save or managing your assets in retirement, this comprehensive overview can help you make smarter, more informed decisions about your IRA.
1. Contributing Too Much—or Too LittleBonds
Contributing more than the annual limit to an IRA can lead to a 6% excess contribution penalty each year the overage remains. Conversely, not contributing enough leaves potential tax-advantaged growth on the table. In 2025, the maximum contribution for individuals under 50 is $7,000 and $8,000 for those aged 50 and older. It’s wise to set up automatic monthly contributions that total your annual goal. Also, check your income limits—Roth IRA contributions phase out at higher income levels, which can make you ineligible to contribute directly.
2. Choosing the Wrong Type of IRA
Selecting between a Traditional and Roth IRA depends on your current tax situation and future expectations. Traditional IRAs provide tax-deductible contributions for many earners, with taxes due upon withdrawal. Roth IRAs are funded with after-tax dollars but offer tax-free growth and withdrawals. A 30-year-old earning $60,000 may benefit from Roth contributions, expecting to retire in a higher bracket, while someone earning $200,000 at age 60 may prefer the upfront deduction of a Traditional IRA.
3. Misusing the Backdoor Roth IRA
The backdoor Roth IRA is a method for high-income earners to gain access to Roth accounts despite income limitations. The process involves contributing to a Traditional IRA and then converting to a Roth. However, the IRS’s pro-rata rule applies—if you have other pre-tax IRA funds, a portion of the conversion becomes taxable.
4. Missing Required Minimum Distributions (RMDs)
RMDs begin at age 73 or 75 (depending on your birth year) and are mandatory for Traditional IRAs. Failing to withdraw results in a penalty of 25% of the missed amount (reduced to 10% if corrected quickly). Using automated withdrawals and scheduling annual reviews can help ensure you stay compliant. For inherited IRAs, RMD rules differ—non-spouse heirs typically must deplete accounts within 10 years.
5. Failing to Understand the Roth Conversion Sweet Spot
Roth conversions allow you to move funds from a Traditional IRA to a Roth IRA by paying taxes on the converted amount now. The key is to convert during low-income years. For instance, a retiree between age 62 and 72, (before RMDs begin) might have lower income and could fill up lower tax brackets with conversions. Converting $30,000 annually during this time can help reduce the size of future RMDs and lower your lifetime tax burden.
6. Forgetting About Spousal IRAs
If only one spouse has earned income, the non-working spouse can still contribute to an IRA as long as the couple files jointly. This frequently overlooked opportunity can double a couple’s contributions for a total of $14,000 or $16,000 (if over age 50) under 2025 limits. A spousal IRA is especially powerful when one partner is focused on caregiving or homemaking and lacks access to employer-sponsored plans.
7. Ignoring Qualified Charitable Distributions (QCDs)
For those aged 70½ or older, QCDs are a tax-savvy way to donate directly from your IRA to charity—up to $100,000 annually. These transfers satisfy RMDs without increasing your adjusted gross income (AGI), which can help avoid Medicare premium surcharges and reduce the taxation of Social Security benefits. Always ensure the funds go directly to the charity to qualify.
8. Not Understanding the SECURE Act’s Impact on Heirs
The SECURE Act changed how inherited IRAs work. Non-spouse beneficiaries must now withdraw the entire balance within 10 years, eliminating the “stretch IRA” option that allowed distributions over a lifetime. This creates potential tax spikes for heirs. Advanced planning techniques like Roth conversions, naming multiple beneficiaries, or using trusts may help reduce the tax burden on your estate.
9. Investing Too Conservatively—or Too Aggressively
While some investors keep IRA assets in cash or overly conservative bonds, stunting long-term growth, others may invest these assets too aggressively in speculative stocks or crypto. A balanced asset allocation matched to your time horizon and risk tolerance is key. As you near retirement, gradually shift from growth to income-generating assets—but maintain some equity exposure to fight inflation.
10. Overlooking Hidden Fees
Favor low-cost index funds and ETFs, and review fund expense ratios and annually. Building a portfolio of these lower cost investments under the guidance of a financial advisor with a 1% advisory fee or lower can aid the growth of your portfolio.
11. Using IRAs as Emergency Funds
IRAs should be reserved for retirement. Early withdrawals typically incur a 10% penalty plus taxes—unless exceptions apply (e.g., first-time home purchases, education, or unreimbursed medical expenses). Build a 3-to-6-month emergency fund in a savings account to avoid tapping into retirement assets prematurely.
12. Failing to Name or Update Beneficiaries
IRA beneficiary designations override wills. If you forget to update them after major life events like divorce or the death of a loved one, your assets could go to the wrong person or your estate (triggering probate). Review these designations every few years and consider naming contingent beneficiaries as well.
13. Not Consolidating Accounts
Having multiple IRAs spread across custodians increases the risk of missed RMDs, higher fees, and administrative headaches. Consolidating accounts can simplify tracking and allow for better portfolio management. Before transferring, ensure you won’t incur surrender charges or tax consequences, especially for annuity-based IRAs.
14. Assuming a Roth Is Always Best
Roth IRAs offer tax-free growth and withdrawals—but they’re not ideal for everyone. High earners nearing retirement may benefit more from Traditional contributions now and converting later. A Roth’s benefits depend on future tax rates, your income needs, and estate planning goals. Blending both Roth and traditional accounts provides flexibility in retirement.
15. Going It Alone
While DIY investing is more accessible than ever, IRAs involve complex tax rules and evolving legislation. A qualified financial planner or tax advisor can help ensure correct contributions, efficient withdrawals, and tailored strategies that align with your long-term goals. The cost of good advice is often far less than the cost of a misstep.
Conclusion
Mistakes with your IRA can lead to costly penalties, lost opportunities, and unnecessary stress. By understanding the most common pitfalls and proactively addressing them, you can secure more of your hard-earned savings for the future. Whether you’re decades from retirement or already drawing RMDs, ongoing education and strategic planning are key to maximizing the benefits of your IRA.