Sneaky Roth IRA Mistakes
Some of the most common mistakes when it comes to contributing to a Roth IRA.
Roth IRAs can be some of the most advantageous retirement accounts out there. In my experience, the Roth IRA is where most young professionals look to begin saving for retirement.
However, there are certain things that some may be unaware of when it comes to contributing to the Roth IRA. There are workarounds as well, but those workarounds can come with a bunch more hurdles.
First off, there are income limitations that dictate one’s eligibility for outright contributions to a Roth IRA.
For 2026, Modified Adjusted Gross Income must be below $153,000 to make a full contribution as a single filer. For married couples, MAGI must be below $242,000.
Now, one nuance is that there is a phaseout range. When MAGI exceeds $168,000 for single filers or $252,000 for married couples, they are entirely phased out from making contributions to the Roth IRA.
This is by far the most common mistake I see. People are unaware of the income limitations or the phaseout entirely but they make a Roth contribution anyways.
Then we get into the headache.
There are generally two different ways to undo the Roth contribution and each has their own consequences.
The timely correction: done within the tax-filing deadline
Untimely corrections: done after the tax filing deadline
Timely corrections can allow for the excess contribution to be distributed. The distribution generally includes the excess contributions as well as the earnings (or net income attributable to the contribution) on the funds. The earnings can be subject to tax, although they can avoid the 10% early withdrawal penalty.
Untimely corrections can result in a 6% annual excise tax on the overcontributed amount until it is removed. This can become a serious drag and should be tended to as quickly as possible.
Now, one more pitfall when it comes to the Roth IRA revolves around the Backdoor Roth.
The Backdoor Roth is like the gateway drug to personal finance. It is a relatively simple maneuver, yet there are a few nuances that I feel are glossed over too often.
The Backdoor Roth entails an after-tax contribution to a Traditional IRA and then having the funds converted to a Roth IRA. For those that exceed the MAGI limitations, this is usually how funding a Roth IRA on an annual basis can occur.
This works well when there are no pre-tax dollars in any existing IRAs, but when there are existing pre-tax balances in any type of IRA, the pro-rata rule comes into play and can make the conversion taxable.
Here’s the most common mistake I see when it comes to Roth conversions that leads to a taxable event.
An individual facilitates a Roth conversion early in the year. They had no pre-tax balances in any IRAs at the time. Looks like a clean conversion, right?
Well, mid-year, they change jobs and roll their pre-tax 401(k) to a Traditional IRA and maintain that pre-tax balance as of 12/31 of that year.
December 31st is the date the IRS uses to dictate whether someone had a pre-tax balance in their IRA. Not the date of conversion.
This results in the conversion that was executed earlier in the year becoming taxable on a pro-rated basis. A great idea and enough awareness to execute on the strategy results in exactly what one was looking to avoid due to an executional nuance.
When it comes to personal finance, understanding a strategy conceptually can look much different than the nuance associated with execution and it is so important to be aware of these nuances.
Be diligent when looking to execute on some of these concepts. There may be more than meets the eye!
This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.