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Top 10 IRA Mistakes and How to Avoid Them Thumbnail

Top 10 IRA Mistakes and How to Avoid Them

You have worked hard at building your retirement savings. Therefore, it is only natural to want these assets to work hard for you. IRAs (individual retirement accounts) are one of the top ways to save for retirement.

IRAs are tax-deferred accounts that have specific rules applied to them set by the IRS.  In this article, we will discuss 10 frequently made IRA mistakes.

In this article, you will learn about the Top 10 most common IRA mistakes:

  • Not keeping up with your beneficiary designations
  • Making spousal rollover mistakes
  • Not maxing out your contribution
  • Required minimum distribution errors
  • Taking early withdrawals from IRAs
  • Ignoring spousal contributions
  • Not paying attention to how you invest your accounts
  • Not taking advantage of Roth IRAs
  • Over contributing to your IRA
  • Not utilizing qualified charitable distributions (QCDs)


Whoever you choose (a person or entity) to inherit your IRA after your passing is known as a beneficiary. You get to pick multiple beneficiaries who will individually inherit a designated amount from your IRA. These beneficiaries can either be primary beneficiaries or contingent beneficiaries. 

Primary beneficiaries will be the first to inherit your IRA. However, contingent beneficiaries get to inherit the account if the primary beneficiaries are unable to take over the account. 

Below is a quick look at some of the most common mistakes when it comes to keeping up with beneficiary designations:

  • Failing to fill out beneficiary designation forms – Although it sounds like a simple mistake, it could cost your heirs time and money when settling your estate.
  • Failing to review or update your beneficiaries – It is vital to update your beneficiaries after every significant life event. Common events include having children, getting married, getting divorced, and deaths in the family.


Did you know that your spouse is free to create an inherited IRA, rollover your IRA to their account, or disclaim an IRA asset? When done correctly, it is a non-taxable event that ensures funds transition from one plan to the other. 

Consider the following spousal rollover methods to determine which is best for you:

  • Rolling over the IRA to their own – This involves rolling the IRA into an IRA into an IRA under the surviving spouse’s name.  The IRA is then treated as the spouse’s own.
  • Disclaiming their right to the IRA – A surviving spouse is allowed to disclaim their right to an IRA if they intend for the assets to get inherited by contingent beneficiaries rather than themselves. 
  • Creating an inherited IRA –Depending on the ages of each spouse, there are special RMD rules if you go this route. This can be a good option for a younger spouse who needs access to this money to live on.


People often take a conservative approach when funding their IRA because it is not payroll deducted or sponsored by an employer. Therefore, they strictly put no more than required into the plan. Most of the time, these individuals fund their accounts with money sitting in checking accounts.

It is vital to treat your IRA as a long-term project. After all, it can only work magic for you and your family if you make the largest contributions possible each year. In 2023, you can contribute a maximum of $6,500 (or $7,500 if age 50 or over) between an IRA and Roth IRA combined.

However, an important thing to be aware of is income limits.  If you make too much money, you may not be able to contribute to a Roth IRA.  Also, you could potentially be ineligible to deduct your IRA contribution if you are covered under an employer retirement plan and your modified adjusted gross income exceeds an amount specified by the IRS.  

It is important to check the IRS website to check your eligibility for retirement contributions of any type.


You probably know about major IRS tax breaks for IRAs, 401(k)s, and other retirement plans. What you may not know is that there is a catch for all this generosity. You are required to start taking yearly withdrawals from retirement accounts (except Roth IRAs) once you reach a specific age. The age you take withdrawals could be 72, 73, or 75 depending on your birthday. Failure to do so exposes you to a penalty of up to 25%. It is important to note that there are special rules for inherited IRAs and inherited Roth IRAS required minimum distributions.

These required minimum distributions out of retirement accounts are often called by the abbreviation RMDs. RMDs are calculated using retirement account values as of December 31st for the prior year and an age table published by the IRS.  It is important to take the correct and entire RMD amount each year to avoid a costly penalty. 


You incur a hefty penalty fee of 10% and taxes if you withdraw money from your IRA before reaching 59 ½ years old. 

However, there are some exceptions like using the cash to buy your first home or for higher education. You can find up to date exceptions to the 10% early withdrawal penalty on the IRS website.


Many people assume that non-working spouses cannot contribute to an IRA because they don't earn income. After all, the IRS states that IRAs can only be funded using earned income. However, there exists a legal exception for non-working spouses – The Spousal IRA

It is a simple provision that allows a non-working spouse to make IRA contributions provided the working spouse earns enough to cover both accounts. Therefore, working/non-working couples can double their contributions.  The deductibility of spousal IRA contributions and the ability to do Roth contributions is government by income limits.


Have you taken the time to consider how your IRAs are invested? Many investors are overly conservative or aggressive for their age.

Start by paying close attention to what is stashed in your 401(k),IRA, and taxable accounts. Tally your holdings to ensure you don't have extreme allocations that can put your retirement at risk. It will also help to reset your target and slowly make the shift towards how you invest your accounts.

If you have questions about investment selection and allocation, a financial advisor is a good place to start. A financial advisor can guide you in determining your ability and willingness to take risk. You can find advisors you can delegate investment selection and management to fully or you can find an advisor who offers a one-time consultation.


Withdrawals from traditional IRAs are tax-deferred. Therefore, you must include distributions from this account in your taxable income. For Roth IRAs, distributions are tax-free provided the account has been in existence for five years and you are at least 59 ½ years old.

Equally, Roth IRAs do not require you to take the required minimum distributions. This means you can allow your Roth IRA to keep on growing until you decide to start making withdrawals. Another plus is you can make contributions towards a Roth IRA even when you are already in an employer-sponsored retirement plan.

However, you must meet specific income requirements to be eligible to contribute to a Roth IRA.  In 2023, a married filing jointly household must have a modified adjusted gross income (MAGI) less than $218,000 to be eligible to do a full Roth contribution.   A person who files as single or head of household must have a MAGI less than $138,000 to be able to do a full Roth contribution.  Finally, a couple who is married filing separately can’t contribute to a Roth IRA at all if they have a MAGI of $10,000 or more.

Ensure you take full advantage of these Roth IRA benefits. After all, it is certainly the biggest tax –giveaway in the 21st century. 


Although it may sound a bit strange, some people find themselves overcontributing to their IRA. It could be because you forgot an earlier contribution or forgot you have no earned income. Whatever the reason, the IRS has strict controls over contributions to IRAs and will penalize you 6% of the extra contribution for every year you fail to correct the issue.

You can fix over-contribution by withdrawing the excess amount or redistributing it to another type of IRA (if you qualify). Finally, you can also carry forward the excess amount into the next financial year to be treated as next year's contribution.


Investors subject to RMDs can direct all or part of their RMD to charity. By having funds sent directly out of your retirement account and to a qualified charity, you can satisfy the RMD and keep the withdrawal from adding to your ordinary income.  This is called a qualified charitable distribution (QCDs).

You can begin making (QCDs) out of your retirement starting at age 70 ½.  Be sure to talk to your financial planner or custodian about the correct way to do a distribution so it counts as a QCD. If done incorrectly you may have to recognize the amount distributed as ordinary income.


Whatever actions you take towards your IRA today will have an impact on your retirement and your beneficiaries. There are rules and regulations involved with all retirement accounts and they change frequently. Working with a financial advisor is one way of making sure you stay in compliance and are invested appropriately for your goals and needs. 

👉 If you would like to get a FREE retirement assessment, click the link to schedule your 20-minute call to start the retirement assessment process.


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