When it comes to managing your finances, small mistakes can lead to big consequences. That’s especially true for Roth IRAs. These tax-advantaged accounts are powerful tools for building wealth, but many young professionals unknowingly make errors that can cost them tens of thousands of dollars over time.
In this article, we’ll explore the 5 most common Roth IRA mistakes, why they matter, and how to avoid them so you can make the most of your money.
1. Thinking You Can’t Access Your Roth IRA Funds Until Retirement
The Mistake:
Many people assume that once money goes into a Roth IRA, it’s locked away until retirement—and taking it out early will result in hefty penalties. This misconception often leads young professionals to skip contributing altogether out of fear they might need the money sooner.
The Truth:
Roth IRAs are more flexible than you think. While the earnings in your account are subject to restrictions, your contributions can be withdrawn at any time—penalty-free and tax-free.
The Fix:
Think of a Roth IRA as a savings account that grows tax-free while keeping your contributions accessible. For example, if you contribute $7,000 this year and need that money in two years, you can withdraw your contributions penalty-free. However, if you don’t need the funds, you can invest them for long-term growth.
Remember: You can’t go back and contribute for prior years. If you skip contributing in 2023, you can’t make up for it later.
2. Leaving Your Roth IRA Contributions in Cash
The Mistake:
Some people contribute to their Roth IRA and leave the money sitting in cash or low-interest accounts, thinking they’ve done enough. While this may make sense if you need the funds soon, it’s a missed opportunity for long-term growth.
The Truth:
Unlike a 401(k), which automatically invests your contributions, a Roth IRA requires you to choose your investments. Many young professionals don’t realize this, or they feel uncertain about picking investments and leave their funds in cash by default.
The Fix:
If you’re contributing for long-term goals, be sure to invest your money. Stocks, ETFs, and index funds are common options for young professionals. Not confident in choosing investments? That’s why FitBUX offers an investment advisory service—to help you make informed decisions.
3. Thinking You Can’t Contribute Because Your Income Is Too High
The Mistake:
A common myth is that high earners can’t contribute to a Roth IRA. This belief often stops people from taking advantage of one of the best wealth-building tools available.
The Truth:
Even if your income exceeds the limits for direct Roth IRA contributions, you can still contribute using a backdoor Roth IRA strategy. This involves contributing to a traditional IRA and then converting those funds to a Roth IRA.
The Fix:
If your income is too high for direct contributions, a Roth Conversion is the solution. It’s an easy, IRS-approved way to bypass income limits and take advantage of tax-free growth.
4. Contributing Directly When Married Filing Separately
The Mistake:
Filing taxes as “married filing separately” comes with unique rules. Many young professionals in this category make ineligible contributions to their Roth IRA, unaware that the income limits are much stricter than other filing statuses.
Why It Matters:
This has become a growing issue due to the rise of income-driven repayment plans (IDRs) for student loans. Filing separately often reduces monthly loan payments but disqualifies many people from directly contributing to a Roth IRA under the usual rules.
The Fix:
If you’re married filing separately, don’t contribute directly. Instead, use the Roth Conversion strategy we discussed earlier. It ensures you stay within IRS rules while taking advantage of the Roth IRA’s benefits.
5. Not Increasing the Contribution Amount
The Mistake:
Many people set and forget. However, this costs you $100,000s in future gains.
The Truth:
A contribution is the money you add directly to your Roth IRA and you should be increasing it every year as your income goes up.
The Fix:
By increasing your contribution by $25 per month each year, you stand to increase your wealth by about $900,000 over a 40 year period! MAKE SURE TO INCREASE YOUR CONTRIBUTION.
Take Action Today
Avoiding these five mistakes will help you unlock the full potential of your Roth IRA. Whether you’re just starting or looking to optimize your strategy, taking the right steps now can save you tens of thousands of dollars and set you up for long-term success.
If you’re unsure about Roth Conversions or want step-by-step guidance, become a Member of FitBUX and get affordable help today!
