Common Beginner Pitfalls with IRAs

Opening your first Individual Retirement Account (IRA) is an exciting milestone in your financial journey. It shows you're thinking seriously about your future and taking concrete steps to build wealth for retirement. However, the path to successful retirement saving is filled with potential missteps that can cost you money, trigger penalties, or simply leave you with less than you could have had.

The good news is that most IRA mistakes are entirely preventable once you know what to watch out for. Many beginners stumble over the same obstacles—contribution limits, tax rules, investment choices, and withdrawal restrictions—simply because they weren't aware of the rules or didn't understand the consequences of their decisions. These aren't complicated financial concepts that require an advanced degree to grasp; they're straightforward guidelines that, once understood, become second nature.

In this guide, we'll walk through the most common pitfalls that trip up new IRA owners, explain why they're problematic, and show you how to avoid them. Whether you've just opened your first IRA or you're planning to, understanding these mistakes ahead of time will help you make the most of your retirement savings and avoid costly errors that could set back your financial goals.

Choosing the Wrong IRA Type

One of the first decisions you'll face is choosing between a traditional IRA and a Roth IRA. This choice has significant tax implications that will affect you for decades, yet many beginners make this decision without fully understanding the differences.

The Traditional vs. Roth Decision

A traditional IRA offers an upfront tax deduction on your contributions (if you qualify), but you'll pay taxes on withdrawals in retirement. A Roth IRA offers no immediate tax benefit, but your withdrawals in retirement are completely tax-free. The right choice depends on your current tax situation and what you expect your tax rate to be in retirement.

Many beginners automatically choose a traditional IRA because they like the immediate tax deduction, without considering that they might be in a higher tax bracket in retirement. This is especially true for young workers who are currently in lower tax brackets but expect their income to grow significantly over their careers. In these cases, paying taxes now at a lower rate (via Roth contributions) and enjoying tax-free growth can be far more beneficial than deferring taxes until retirement when their rate might be higher.

Not Considering Your Future Tax Situation

Think about where you are in your career. If you're just starting out with a modest salary, you're likely in a relatively low tax bracket. Paying taxes on your income now and contributing to a Roth IRA might make more sense than taking a deduction today only to pay higher taxes in retirement when you're hopefully earning more from your investments and other income sources.

Conversely, if you're already well-established in your career with a high income, the immediate tax deduction from a traditional IRA contribution could be quite valuable, especially if you expect your income (and therefore tax rate) to decrease in retirement.

Ignoring Income Limits

Another mistake beginners make is not checking whether they're eligible to contribute to certain IRA types. Roth IRAs have income limits—if you earn too much, you can't contribute directly to a Roth IRA (though there are legal workarounds like the backdoor Roth strategy). For 2024, single filers with modified adjusted gross income above $161,000 are phased out of Roth contributions entirely.

Traditional IRAs don't have income limits for contributions, but if you or your spouse are covered by a workplace retirement plan, your ability to deduct those contributions may be limited or eliminated at higher income levels.

Contributing Too Much or Too Little

IRA contribution mistakes are among the most common errors beginners make, and they can result in penalties and tax headaches.

Exceeding the Annual Contribution Limit

The IRS sets annual limits on how much you can contribute to IRAs. For 2024, the limit is $7,000 ($8,000 if you're 50 or older). This limit applies to the total of all your traditional and Roth IRA contributions combined—it's not per account.

Many beginners don't realize that if they contribute to multiple IRAs, those contributions are aggregated. For example, if you contribute $4,000 to a traditional IRA and $4,000 to a Roth IRA in the same year, you've exceeded the limit by $1,000 (assuming you're under 50). This excess contribution is subject to a 6% excise tax for every year it remains in the account, and you'll need to withdraw it (along with any earnings) to avoid ongoing penalties.

Contributing When You Don't Have Earned Income

You can only contribute to an IRA if you have earned income (wages, salaries, self-employment income, etc.) during the tax year. Investment income, rental income, Social Security benefits, and unemployment compensation don't count as earned income for IRA purposes.

Some beginners contribute to an IRA during a year when they didn't work, thinking they're being proactive about retirement savings. Unfortunately, these contributions are considered excess contributions and are subject to penalties. The one exception is a spousal IRA—if you're married and file jointly, a working spouse can contribute to an IRA on behalf of a non-working spouse.

Not Contributing Enough

On the flip side, many beginners contribute too little or not at all, often because they think they can't afford it or they're waiting until they have more money. The reality is that even small, consistent contributions made early in your career can grow substantially thanks to compound interest.

If you contribute just $200 per month starting at age 25, assuming a 7% annual return, you'll have over $525,000 by age 65. Wait until age 35 to start, and that same $200 per month will grow to only about $244,000—less than half as much, despite only a 10-year delay. The lesson: start contributing as soon as you can, even if the amounts are small.

Missing the Contribution Deadline

Many beginners don't realize that you have until the tax filing deadline (usually April 15th) to make IRA contributions for the previous tax year. This extended deadline is incredibly valuable because it allows you to make contributions after the year ends, potentially after you know your exact income and tax situation.

However, some beginners mistakenly think they have until April 15th of the following year to contribute for the current year, or they simply forget about this opportunity altogether. Mark your calendar and make sure your IRA custodian codes your contribution for the correct tax year, especially for contributions made in January through mid-April.

Taking Early Withdrawals

IRAs are designed for retirement savings, and the tax code includes penalties to discourage you from raiding your retirement accounts early. Yet many beginners tap their IRAs for non-retirement expenses, triggering taxes and penalties that significantly diminish their savings.

The 10% Early Withdrawal Penalty

If you withdraw money from a traditional IRA before age 59½, you'll generally owe income tax on the withdrawal plus a 10% early withdrawal penalty. This penalty is in addition to the regular income tax, making early withdrawals extremely expensive.

For example, if you're in the 22% tax bracket and withdraw $10,000 early, you'll owe $2,200 in federal income tax plus $1,000 in penalty—a total of $3,200, leaving you with just $6,800. And that doesn't account for state taxes or the lost decades of potential investment growth on that money.

Not Knowing the Exceptions

While the early withdrawal penalty is harsh, there are several exceptions that allow penalty-free early withdrawals (though you'll still owe income tax on traditional IRA withdrawals). Beginners often aren't aware of these exceptions and either miss opportunities to access money without penalty or incorrectly assume they're exempt when they're not.

Common exceptions include:

• First-time home purchase (up to $10,000 lifetime)
• Qualified higher education expenses
• Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income
• Health insurance premiums if you're unemployed
• Disability
• Substantially equal periodic payments (SEPP)

Confusing Roth and Traditional Rules

Roth IRAs have different withdrawal rules than traditional IRAs, and beginners often confuse them. With a Roth IRA, you can withdraw your contributions (but not earnings) at any time, for any reason, without taxes or penalties because you already paid taxes on that money.

However, withdrawing earnings from a Roth IRA before age 59½ and before the account has been open for five years will trigger taxes and potentially penalties. Many beginners don't understand this distinction and either avoid Roth withdrawals when they actually could access their contributions penalty-free, or they withdraw earnings thinking all Roth withdrawals are tax-free.

Viewing Your IRA as an Emergency Fund

One of the biggest conceptual mistakes beginners make is treating their IRA as a readily accessible emergency fund. While it's technically possible to withdraw money from an IRA, doing so should be a last resort. The combination of taxes, penalties, and lost growth opportunity makes IRA withdrawals one of the most expensive ways to access cash.

Before opening an IRA, make sure you have a separate emergency fund with three to six months of expenses in a readily accessible savings account. Only after you have that safety net should you focus on retirement contributions.

Poor Investment Choices

Opening an IRA is just the first step—you also need to invest the money inside the account. Many beginners make critical mistakes at this stage that undermine their retirement savings.

Leaving Money in Cash

Perhaps the most common investment mistake beginners make is contributing to an IRA but never actually investing the money. The cash sits in a money market fund or settlement account earning minimal interest, missing out entirely on the growth potential of stocks and bonds.

This happens because some beginners don't realize that contributing to an IRA and investing that money are two separate steps. They think opening the account and depositing money is enough, not understanding that they need to actively select investments. Years can pass before they discover their money has been sitting in cash, costing them tens of thousands of dollars in lost growth.

Taking on Too Much Risk

On the other end of the spectrum, some beginners invest too aggressively, putting all their IRA money into a handful of individual stocks or high-risk investments. While higher risk can potentially mean higher returns, it can also mean devastating losses, especially if you lack the knowledge or experience to pick individual stocks successfully.

Concentrating your retirement savings in just a few investments leaves you vulnerable to significant losses if those particular investments perform poorly. Diversification—spreading your money across many different investments—is a fundamental principle of sound investing that beginners sometimes overlook in pursuit of the next hot stock.

Not Diversifying

Diversification means not putting all your eggs in one basket. A well-diversified portfolio includes a mix of stocks and bonds, domestic and international investments, large and small companies, and various market sectors. This approach reduces risk because when one investment or market sector performs poorly, others may perform well, smoothing out your overall returns.

Many beginners create poorly diversified portfolios by investing only in what they know (often their employer's stock or just U.S. large-cap stocks) or by chasing recent performance (buying whatever has done well lately). A simple, low-cost, diversified approach using index funds or target-date funds is often far superior to a complex portfolio of hand-picked investments.

Paying High Fees

Investment fees might seem small—what's 1% or 2% per year?—but over decades, high fees can consume a substantial portion of your returns. A portfolio with a 2% annual fee needs to earn 2% more than a low-cost alternative just to break even, and compounded over 30 or 40 years, those fees can cost you hundreds of thousands of dollars.

Beginners often gravitate toward actively managed mutual funds with high expense ratios, not realizing that low-cost index funds typically outperform them over the long term. Look for investments with expense ratios below 0.20%, and be wary of funds charging 1% or more unless there's a compelling reason to pay those higher fees.

Trying to Time the Market

Many beginners believe they can outsmart the market by buying when prices are low and selling when prices are high. In reality, even professional investors consistently fail at market timing. Numerous studies show that time in the market beats timing the market.

Beginners who try to time the market often end up buying after prices have already risen (driven by fear of missing out) and selling after prices have fallen (driven by panic). This buy-high, sell-low pattern is the opposite of successful investing and can significantly undermine returns.

Overreacting to Market Volatility

Stock markets fluctuate—sometimes dramatically. During your investing lifetime, you'll experience multiple market downturns, some quite severe. Beginners often panic during these downturns and sell their investments, locking in losses and missing the subsequent recovery.

The key is understanding that volatility is normal and expected. If you have decades until retirement, short-term market drops are actually opportunities, not disasters. They allow you to buy investments at lower prices. The investors who panic and sell during downturns are often the ones who end up with disappointing long-term results.

Neglecting to Rebalance

Over time, different investments in your portfolio will grow at different rates, causing your asset allocation to drift from your target. For example, if you intended to hold 70% stocks and 30% bonds, but stocks perform well for several years, you might end up with 85% stocks and 15% bonds without making any changes.

This drift means you're taking on more risk than you intended. Rebalancing—periodically selling some of your better-performing investments and buying more of your underperforming ones—keeps your risk level consistent with your goals and risk tolerance.

Many beginners set up their initial portfolio and then never touch it for years, allowing their asset allocation to become increasingly misaligned with their intended strategy. Make a habit of reviewing and rebalancing your portfolio at least annually, or whenever your allocation drifts significantly from your target.

Not Understanding Required Minimum Distributions

This pitfall might seem far off for beginners, but understanding it now can influence your IRA strategy. Once you reach age 73 (75 for those born in 1960 or later), you must start taking required minimum distributions (RMDs) from traditional IRAs. These mandatory withdrawals are taxable and are calculated based on your account balance and life expectancy.

Failing to take your RMD results in a penalty of up to 25% of the amount you should have withdrawn—one of the harshest penalties in the tax code. Many beginners don't know about RMDs and are unpleasantly surprised when they reach retirement age and discover they must start withdrawing money whether they need it or not.

Roth IRAs don't have RMDs during the owner's lifetime, which is another significant advantage of Roth accounts and one more reason to consider Roth contributions, especially early in your career.

Forgetting About Beneficiary Designations

When you open an IRA, you'll be asked to name beneficiaries—the people who will inherit your account if you die. Many beginners rush through this section or fail to update it after major life changes like marriage, divorce, or the birth of children.

Not Naming Beneficiaries

If you don't name beneficiaries, your IRA will typically pass through your estate, which can create tax complications and delay the distribution to your heirs. Naming beneficiaries allows your IRA to transfer directly to them, bypassing probate.

Failing to Update Beneficiaries

Life changes, and your beneficiary designations should change with it. Many people forget to update their IRA beneficiaries after divorce, remarriage, or the death of a named beneficiary. Your beneficiary designation overrides your will, so even if your will says your IRA should go to your current spouse, if your ex-spouse is still listed as the beneficiary on the account, they'll receive the money.

Not Naming Contingent Beneficiaries

Contingent (or secondary) beneficiaries receive your IRA if your primary beneficiaries predecease you or disclaim the inheritance. Not naming contingent beneficiaries means your IRA could end up going through your estate if your primary beneficiaries can't inherit.

Commingling Rollover Funds Incorrectly

If you have a 401(k) or other employer retirement plan from a previous job, you might decide to roll it over to an IRA for better investment options or lower fees. This is generally a smart move, but beginners sometimes make mistakes in how they execute the rollover.

Indirect Rollovers Gone Wrong

There are two types of rollovers: direct (trustee-to-trustee transfer) and indirect (you receive the money and redeposit it). With an indirect rollover, your employer will withhold 20% for taxes, and you have 60 days to deposit the full amount (including making up that 20% from other sources) into an IRA. If you miss the 60-day deadline or can't replace the withheld amount, that money becomes a taxable distribution.

Beginners should almost always use direct rollovers, where the money moves from your old employer plan directly to your new IRA without you touching it. This avoids the withholding issue and the 60-day deadline pressure.

The One-Rollover-Per-Year Rule

If you do take an indirect rollover, be aware that you can only do one IRA-to-IRA rollover per 12-month period across all your IRAs. Many beginners don't know about this rule and inadvertently create taxable events by doing multiple indirect rollovers in a short timeframe.

Direct trustee-to-trustee transfers don't count toward this limit and can be done as often as needed, which is yet another reason to always use direct transfers when moving money between retirement accounts.

Not Keeping Good Records

IRA record-keeping might not seem exciting, but poor documentation can cost you money down the road.

Losing Track of Non-Deductible Contributions

If you make non-deductible contributions to a traditional IRA (because your income is too high to deduct them), you must file Form 8606 with your tax return to establish your basis—the amount you've already paid taxes on. This basis becomes important when you take distributions because you won't owe taxes twice on the same money.

Many beginners either don't file Form 8606 when required or lose track of these forms over the years. Decades later when they start taking distributions, they have no documentation of their basis and might end up paying taxes on money they already paid taxes on. Keep all your Forms 8606 permanently.

Not Tracking Which Tax Year Contributions Apply To

Since you can make IRA contributions for a given tax year until the following April, it's important to track which year each contribution applies to. If you make a contribution in March 2025, is it for 2024 or 2025? Your IRA custodian should track this, but you should verify it and keep your own records, especially for contributions made early in the year.

Ignoring the Benefits of Automation

One of the simplest ways to ensure consistent retirement saving is to automate your IRA contributions, yet many beginners fail to set this up.

Manual Contributions Lead to Inconsistency

If you rely on manual contributions, you'll inevitably skip months when money is tight or when life gets busy. Automatic monthly transfers from your checking account to your IRA enforce saving discipline and leverage dollar-cost averaging—investing a fixed amount regularly means you'll automatically buy more shares when prices are low and fewer when prices are high.

Missing Employer Match Opportunities

If your employer offers a 401(k) with matching contributions, contributing to an IRA before maximizing your employer match is generally a mistake. The employer match is free money—often a 50% or 100% return on your contribution. Always capture the full employer match before directing money to an IRA.

Not Seeking Help When Needed

Finally, many beginners struggle because they try to figure everything out on their own. While self-education is admirable and this guide is part of that process, there are times when professional guidance can prevent costly mistakes and provide peace of mind.

When to Consult a Professional

Consider working with a financial advisor or tax professional if:

• You're unsure whether to choose a traditional or Roth IRA
• You have multiple retirement accounts and need a coordination strategy
• You're planning a Roth conversion
• Your income fluctuates significantly from year to year
• You need help creating an investment strategy appropriate for your goals and risk tolerance
• You've made a mistake and need help correcting it

Look for fee-only fiduciary advisors who are legally obligated to act in your best interest, rather than commission-based advisors who may have conflicts of interest.

Correcting Mistakes

If you've already made one of these mistakes, don't panic. Many IRA errors can be corrected, though the sooner you address them, the better.

Excess contributions can be removed along with any earnings before the tax filing deadline (including extensions) to avoid ongoing penalties. Contributions made to the wrong year can often be recharacterized. Incorrect beneficiary designations can be updated at any time. Even some early withdrawals can be returned to the IRA within 60 days to undo the distribution.

If you discover a mistake, contact your IRA custodian immediately. They can often walk you through the correction process, or you may need to consult with a tax professional to ensure you handle it properly.

Conclusion

The path to successful retirement saving through an IRA doesn't have to be complicated, but it does require attention to detail and an understanding of the rules. The mistakes we've covered in this guide—choosing the wrong account type, contributing incorrectly, making poor investment choices, taking early withdrawals, and neglecting important administrative details—are all avoidable with the right knowledge.

The most successful IRA investors are those who start early, contribute consistently, invest wisely in low-cost diversified portfolios, and then largely leave their accounts alone to grow over decades. They don't try to time the market, they don't panic during downturns, and they think of their IRA as truly untouchable money meant for retirement, not for short-term needs.

By understanding these common pitfalls before you encounter them, you're already ahead of many beginners. Use this knowledge to set up your IRA correctly from the start, establish good habits around contributions and investing, and build the foundation for a financially secure retirement. And remember, even if you make a mistake, most can be corrected—the key is recognizing the error quickly and taking action to fix it.

Your future self will thank you for the care and attention you put into your retirement savings today. Start with the basics, avoid these common mistakes, and you'll be well on your way to building the retirement nest egg you deserve.