Roth IRA Mistakes: 15 Common Roth Conversion and Savings Mistakes People Make

Roth IRA mistakes can cost you valuable tax savings and limit your retirement options. Many people have considered opening—or converting to—a Roth IRA or Roth 401(k) after hearing about the benefits from a friend, advisor, or financial article. The appeal is clear: Roth accounts let you pay taxes now so your future withdrawals are tax-free.

A Roth helps you keep more of your money, just like other retirement accounts. But when used strategically, it can be an especially powerful tool for lowering your lifetime tax bill. The key is avoiding common missteps that can undermine those benefits.

A Roth is a retirement savings account where you pay taxes on the money you contribute. Your money then grows tax free, you can withdraw it without paying taxes, and you don’t have to take minimum distributions at any age. (Learn more about the benefits of a Roth.)

With a traditional 401k or IRA, you defer taxes on your contributions and pay them later when you withdraw the money.

Roths can offer fantastic benefits, but they don’t suit everyone, and people often make significant mistakes with them. Below are 15 mistakes to avoid with Roth accounts.

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

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

You can contribute to both a Roth IRA and your employer-sponsored retirement plan, and if you have the cash flow, you probably should.

The limit for contributions to IRAs (Roth and traditional) for 2024 is $7,000 plus an additional $1,000 in catch-up contributions if you are 50 or older.

The 401k annual contribution limit is $23,000 for 2024, plus a $7,500 catch-up contribution if you are 50 or older.

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

It’s true, there are income limits when it comes to contributing to a Roth account. In 2024, you can only save into a Roth if your modified adjusted gross income (MAGI) is below a certain threshold. Check out the latest income limits set by the IRS.

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

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 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

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 5 years before withdrawal.

Withdrawing the money before 5 years have passed, will result in a 10% early withdrawal penalty

5. Contributing Too Much in a Roth

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

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

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)
• Future changes to the tax code
• 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
• Your goal for doing conversions: For example, do you want to minimize lifetime taxes? Stay below a certain tax or IRMAA threshold? Maximize your estate value?

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.

Here are some resources to help you know how to optimize Roth conversions:

Avoid Roth IRA Mistakes with Boldin’s Roth Conversion Explorer

The Explorer is Part of Boldin’s PlannerPlus. The tool helps eliminate the guesswork of if and when you should do conversions. The Explorer will use your plan and run thousands of scenarios to identify personalized strategies for you to convert based on a goal of your choosing.

Modeling Conversions in the Boldin Retirement Planner

As described above, the Roth Conversion Explorer suggests conversions based on a goal you choose. However, you may have other Roth conversion scenarios you wish to consider. You can model any potential conversion in the Boldin Retirement Planner and immediately see the impact on your lifetime tax expenditure and your increased tax expense for the year you convert. Or, evaluate it in terms of your future cash flow. What impact will the conversion have on your Required Minimum Distributions? And more…

Advice from a Fee-Only Financial Advisor

How to save? How much to save? If you should convert? These may seem like simple questions, but the reality is that it is complex and it can be reassuring to work with a professional to get answers that are right for you.

If you are interested in a personalized Roth conversion strategy and want professional expertise, collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from Boldin Advisors to identify and achieve your goals. Book a free discovery session.

8. Not Investing Appropriately

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

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.

The Boldin Retirement Planner can give you insight into your tax bracket for all future years. This can help you see opportunities for doing Roth conversions.

10. Not Modeling Your Future Income

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 Boldin Retirement 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

For better or worse, very often in couples one partner 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 are 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)

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 $16,000 for your household. ($7,000 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

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

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

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.

The Clarity You Need to Avoid Roth IRA Mistakes

The Boldin Retirement Planner is the most comprehensive tool available online. The easy-to-use system helps you make better decisions, enjoy improved financial outcomes, and experience more peace of mind about your money. With its advanced modeling capabilities, you can test different Roth IRA strategies, run what-if scenarios, and see exactly how each decision impacts your long-term financial picture. That’s a great way to avoid costly Roth IRA mistakes.

Whether you are evaluating a conversion this year, planning for tax changes, or simply trying to maximize your savings, the planner gives you the clarity you need. By understanding the trade-offs and timing of each move, you can avoid costly mistakes and make confident, informed choices about your retirement.

Your retirement deserves more than guesswork—start using the Boldin Retirement Planner today to take control of your future.

FAQs About Roth IRA Mistakes and Conversion Strategies