Individual Retirement Accounts (IRAs) are one of the most powerful tools for building a secure financial future. Whether you’re using a Traditional IRA for tax-deferred growth or a Roth IRA for tax-free withdrawals, these accounts offer significant advantages. However, making the wrong moves with your IRA can lead to steep penalties, missed growth opportunities, and long-term financial setbacks. To help you stay on track, here are three costly IRA mistakes to avoid—and how to prevent them.
1. Missing the Required Minimum Distributions (RMDs)
Once you reach age 73 (or 72 if you turned 72 before January 1, 2023), you must begin taking Required Minimum Distributions from your Traditional IRA. Failing to take the correct RMD on time can result in a hefty penalty—a whopping 25% of the amount you should have withdrawn (recently reduced from 50%).
Why It Matters: RMDs are the IRS’s way of eventually taxing the money you’ve deferred. Missing them not only triggers penalties but can also disrupt your cash flow or long-term tax planning strategy.
How to Avoid It:
- Keep track of your RMD start date and use the IRS Uniform Lifetime Table to calculate your annual withdrawal amount.
- Automate distributions through your IRA custodian.
- Consult a financial advisor to coordinate withdrawals if you have multiple IRA accounts.
2. Contributing Too Much (or In the Wrong Account)
Each year, the IRS sets a maximum contribution limit for IRAs. In 2025, the contribution limit is $7,000 ($8,000 if you’re age 50 or older). Contributing more than the allowed limit—or contributing to a Roth IRA when your income is too high—can trigger a 6% excess contribution penalty for each year the excess remains in your account.
Why It Matters: While the penalty may seem small at first, it can accumulate and eat away at your returns. Plus, making excess contributions may complicate your tax filings and create administrative headaches.
How to Avoid It:
- Check your eligibility and income thresholds for Traditional and Roth IRA contributions each year.
- Keep good records of your contributions and withdrawals.
- If you accidentally overcontribute, withdraw the excess (and any earnings) before the tax filing deadline.
3. Withdrawing Funds Too Early
Taking money out of your IRA before age 59½ usually results in a 10% early withdrawal penalty—on top of regular income tax for Traditional IRAs. While Roth IRAs allow for contributions to be withdrawn tax- and penalty-free at any time, early withdrawal of earnings may still incur taxes and penalties if the account is under 5 years old.
Why It Matters: Early withdrawals don’t just cost you in penalties—they disrupt the compound growth that makes retirement accounts so powerful. Even small withdrawals today could mean thousands of dollars less in retirement.
How to Avoid It:
- Create an emergency fund separate from your retirement accounts to avoid tapping into IRAs prematurely.
- Know the exceptions to the penalty rule—such as qualified first-time home purchases, certain medical expenses, or higher education costs—and document any use carefully.
- Use a Roth IRA as a last-resort emergency source only after considering long-term implications.
Final Thoughts
An IRA can be a cornerstone of your retirement strategy—but only if you use it wisely. Avoiding these common pitfalls—missing RMDs, overcontributing, and withdrawing too soon—can save you thousands in penalties and lost returns. If you’re unsure about your strategy or have multiple retirement accounts to manage, working with a financial professional can help you make the most of your savings.
Planning smart today means living comfortably tomorrow. Stay informed, stay proactive, and your IRA will serve you well for years to come.