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4 IRA Mistakes You Don’t Want to Make

Moneymagpie Team 3rd Feb 2025 No Comments

Reading Time: 3 minutes

IRAs are a simple and effective way to invest. All it takes is choosing a brokerage, completing some paperwork, and starting to fund your account. That said, even with a process this straightforward, you should make informed decisions. Here are a few common mistakes to watch out for when managing your account.

Overlooking Roth Contributions

Roth IRAs are among the most valuable retirement planning tools available to investors. For individuals within the income eligibility limits, capped at just over $200,000 in annual household income in 2021, Roth IRAs offer a rare opportunity to contribute directly. These accounts stand out as the only tax-exempt retirement option not tied to traditional employment benefits.

With earned income, contributors can invest and grow their wealth completely tax-free, with all withdrawals also escaping taxation. Beyond the clear financial advantages, there’s a powerful psychological benefit to owning a Roth IRA.

Knowing that your Roth funds, after meeting the five-year rule, are completely tax-free for life provides peace of mind, especially given the probability of higher future tax rates. For those eligible, a Roth IRA is an undeniable asset.

Overlooking Cost

Keeping your IRA and its investments as cost-effective as possible is vital for achieving long-term investing success. Many companies impose avoidable fees, such as administrative charges, trading commissions, and management costs.

As a smart investor, avoid these expenses, especially those that are small but frequent. Over time, these seemingly minor fees can go unnoticed yet significantly reduce your overall returns.  Costs can be particularly burdensome with actively managed mutual funds or other unnecessarily expensive investment options. This makes it essential to review the expense ratio of any investment product you own.

Remember, higher costs do not necessarily mean higher quality when selecting investments. Opt for Tax-Advantaged Crypto IRA accounts, as they often have lower fees compared to traditional IRAs. Stay vigilant and aim to minimize your investment costs to the absolute essentials.

Missing the Big Picture

Think of your IRA, Roth, or other retirement accounts as segments of your overall financial plan. Rather than treating them as isolated accounts, it’s wise to view them as components of a broader strategy. This perspective can help you balance the level of risk in your portfolio and optimize tax management efforts. 

Many investors often ask how to best invest their IRAs, which is certainly an important question. However, the answer depends on their broader financial context. For instance, someone whose investments are entirely in stocks might approach their IRA differently from someone whose assets are entirely in cash. Every individual has unique circumstances, so there’s no universal solution. Take the time to assess what approach best fits your specific needs and goals.

Errors in Rollovers Leading to Financial Loss

At some stage, you might need to move your retirement funds. Learn how to do this without triggering penalties or taxes. For IRAs, there are three main options to consider:

  • Transfers: A transfer shifts funds from one account to another of the same type, such as moving a Roth IRA from one financial institution to another, and this process is tax-free.
  • Rollovers: A rollover moves funds either to a similarly registered account or to a different account type, like from a 401(k) to a traditional IRA. 
  • Conversions: A conversion switches a traditional IRA into a Roth IRA, which means you’ll need to pay taxes on any untaxed amounts during the process.

Endnote

At first glance, IRAs might appear to be an easy way to protect your money from taxes and capital gains, but when it comes to your retirement savings, the details can make all the difference. Build your understanding to steer clear of these frequent pitfalls.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.



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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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