15 Mistakes People Make With Roth IRAs

Advertising Disclosure: When you buy something by clicking links on our site, we may earn a small commission, but it never affects the products or services we recommend.

woman confused frustrated questioning
Roman Samborskyi / Shutterstock.com

Editor's Note: This story originally appeared on NewRetirement.

It is highly likely that you have considered saving (or converting existing savings) into a Roth IRA or 401(k). Someone, a friend, family member, adviser, your bank, or colleague may have recommended it to you. And, you have most certainly seen, if not read, an article about the benefits of Roth.

All retirement savings accounts are designed to help you save money on taxes. And, Roths can be a particularly great way to reduce your tax burden.

What’s a Roth? A Roth is a retirement savings account. With a Roth, you pay taxes on the money you contribute to the account. The trade-offs (and reasons they are wildly popular) are that your money grows tax-free, withdrawals are not taxed, and you are not required to take minimum distributions at any certain age. (Learn more about the benefits of a Roth.)

(With a traditional 401(k) or IRA, your savings contributions are tax-deferred. You don’t pay taxes on the money you save.)

Roths can be fantastic but are not always for everyone, and significant mistakes can be made. Below are 15 mistakes to avoid with Roth accounts.

1. Not Opening a Roth Because You Already Have a 401(k)

Krakenimages.com / Shutterstock.com

There are two main types of retirement savings accounts: IRAs (traditional and Roth) and employer-sponsored retirement accounts like 401(k)s (traditional and Roth), SEPs, 403(b)s, etc.

If you are saving into a retirement plan at work, you are still allowed to save into an IRA or a Roth IRA and, if you have the cash flow, you probably should.

You are allowed to contribute to both a Roth IRA and your employer-sponsored retirement plan.

The limit for contributions to IRAs (Roth and traditional) is $6,000 for 2022 and $6,500 for 2023, plus an additional $1,000 in catch-up contributions per year if you are 50 or older.

The 401(k) annual contribution limit is $20,500 for 2022, plus a $6,500 catch-up contribution if you are 50 or older. It’s $22,500 for 2023, plus a $7,500 catch-up contribution.

2. Not Taking Advantage of a Roth Because You Make Too Much Money

Senior woman with money
Sean Locke Photography / Shutterstock.com

It’s true, there are income limits when it comes to contributing to a Roth account. In 2022, you can only save into a Roth if your modified adjusted gross income (MAGI) is $144,000 or less as a single filer, or $214,000 or less as a married couple filing jointly. For 2023, those caps are $153,000 and $228,000, respectively.

However, the income limit should not discourage you from taking advantage of Roth accounts. While you can not save directly into a Roth, you can save into a traditional IRA and convert those monies into a Roth. This is often referred to as “backdoor” Roth savings.

Learn more about the backdoor Roth.

3. Converting Money to a Roth Without Following the Rules

senior woman shocked by bill
Rocketclips, Inc. / Shutterstock.com

When converting money from a traditional retirement savings vehicle to a Roth, you need to follow the rules for the conversion. You can do a:

  • Rollover: A rollover is when you take a distribution from your traditional IRA and are sure to deposit that money in a Roth account within 60 days.
  • Trustee-to-trustee transfer: This is where you direct the institution that holds your traditional IRA to transfer the funds to a different institution where your Roth account is held.
  • Same-trustee transfer: In this case, both your traditional and Roth accounts are with the same institution, and you direct them to make the transfer.

If you were to simply withdraw the funds from your retirement plan and put them into a Roth IRA, you could be assessed a 10% early-distribution tax.

4. Withdrawing Converted Roth Funds Too Early

Suprised first-time Medicare enrollees
CREATISTA / Shutterstock.com

The beauty of a Roth is that the funds grow tax-free. So, in general, you want time for the account to grow after you have done a Roth conversion.

More specifically and importantly, it is very important to know that converted Roth funds must remain in your Roth IRA for at least five years before withdrawal.

Withdrawing the money before five years have passed will result in a 10% early withdrawal penalty.

5. Contributing Too Much to a Roth

Shocked man with piggy bank
pathdoc / Shutterstock.com

As noted above, there are limits to how much you can contribute to a Roth. The IRS will charge you a 6% penalty tax on any investments that are in excess of the limits. The penalty is assessed for each year in which you have not taken action to correct the error.

6. Not Having the Cash Flow Available to Pay Taxes on a Roth Conversion

Seniors happily planning budget and spending money
Syda Productions / Shutterstock.com

Unlike contribution limits, there are no limits to how much you can convert to a Roth. However, you must be able to pay the taxes due on the conversion.

Your conversion may be limited by how much tax you can afford in any given year.

The converted funds will be treated by the IRS as income and taxed as such.

7. Improper Planning of When to Do Conversions

Unhappy senior couple doing taxes
Cat Box / Shutterstock.com

The timing of when to do Roth conversions is tricky.

What can get complicated is deciding the timing of how much to do and when. There are many important factors to consider:

  • Your income (current and future)
  • Your tax bracket (current and future)
  • How much money you have in traditional accounts and the value of the required minimum distributions (RMDs) when you become of age
  • Available cash to pay taxes on conversion
  • How much time between the conversion and when you will start to withdraw funds
  • The rate of return you will make on the Roth funds

It can be complicated trying to figure out how much to convert and when. Many people find that it is best to spread out conversions and have a multi-year conversion strategy. Using a trusted online resource, such as the NewRetirement Planner, or consulting with a fee-only financial adviser can help guide conversion decisions.

8. Not Investing Appropriately

Man shocked by taxes
Prostock-studio / Shutterstock.com

Tax-free growth is the name of the Roth IRA game. As such, you want to make sure that your funds in a Roth IRA are invested for growth that is appropriate for your age and risk tolerance.

9. Using a Roth When You Are in Your Highest Tax Bracket

Man worried about taxes
Krakenimages.com / Shutterstock.com

If you are in your highest-earning years, chances are you’ll probably be better served with traditional contributions than Roth during those years.

And, if you think taxes will be lower in the future, a Roth conversion probably is not for you right now.

10. Not Modeling Your Future Income

confused senior looking at computer
metamorworks / Shutterstock.com

Many people think that their income will fall in retirement and that taxes will not be a factor.

However, this may not be true, particularly if you have significant retirement savings. Required minimum distributions (RMDs) may push your income levels into higher tax brackets.

Modeling future income enables you to understand whether Roth savings or a Roth conversion is a good idea for you.

The NewRetirement Planner enables you to model your future income and the system automatically factors your RMDs. This can help you see future tax brackets and liabilities.

11. Overlooking Your Spouse’s Opportunities for Saving

Happy couple saving money
Mladen Mitrinovic / Shutterstock.com

For better or worse, couples very often have one partner who is more involved with the household’s financial health than the other — even if you are both bringing in income. And, sometimes this imbalance means that the financially savvy partner is making all the right moves with his or her money, but is not necessarily taking advantage of partner opportunities.

If your spouse has income, make sure they are saving in the most advantageous vehicles possible, which may be a Roth account.

12. Overlooking Opportunities to Save for Your Spouse (Even if They Don’t Have Income)

Couple with savings
Andrey_Popov / Shutterstock.com

In general, you need to have earnings in order to save in tax-advantaged savings vehicles.

However, if you are married and file a joint return, then you can max out a Roth IRA for each spouse by using a spousal IRA. You can contribute on their behalf and the annual individual contribution limits are the same.

So, if you are married, both over 50, file a joint return, and only one spouse has income, you can still contribute a maximum of $14,000 for your household. (That’s $6,000 plus an additional $1,000 in catch-up contributions for each of you.)

13. You Think You Are Too Old or Too Young to Contribute to a Roth

A senior woman and her adult child
Monkey Business Images / Shutterstock.com

There is no age restriction for contributing or converting funds to a Roth IRA.

The real factor to consider is your tax liability for one type of savings vehicle or the other.

14. Not Naming and Updating Beneficiaries

Happy middle class family at home
Iakov Filimonov / Shutterstock.com

This is not necessarily specific to Roth accounts, but not naming and updating beneficiaries for accounts is a mistake often made. And, it is very relevant to Roth accounts.

Not having a beneficiary or having the wrong beneficiary will seriously derail your estate plans.

15. Not Considering Roth Savings and Conversions in Light of a Comprehensive Financial Plan

Financial adviser
Potstock / Shutterstock.com

No financial decision should ever be made without understanding the pros and cons in terms of both your current and future overall financial picture.

There are so many considerations that will impact the real benefit (or downside) of doing a conversion. For example, your family and potential inheritance can be impacted by whether or not your savings are in a Roth.

Maintaining a comprehensive written financial plan is a great way to model the impact of your decisions.

Get smarter with your money!

Want the best money-news and tips to help you make more and spend less? Then sign up for the free Money Talks Newsletter to receive daily updates of personal finance news and advice, delivered straight to your inbox. Sign up for our free newsletter today.