The most costly mistakes with an IRA: How to avoid losing big

Individual Retirement Accounts (IRAs) are essential pillars of retirement planning in the United States. Their main advantage lies in their preferential tax treatment, which enables savers to grow their capital over the long term, while reducing their current or future tax burden. 

But like all financial products, IRAs require careful management. Used incorrectly, they can lead to errors with significant financial consequences, particularly in terms of taxes, penalties and returns. Here are the main mistakes to avoid.

1. Making the wrong choice between a Traditional IRA and a Roth IRA

One of the most common mistakes is failing to understand the fundamental differences between the two types of IRAs. In a Traditional IRA, contributions are generally tax-deductible, but withdrawals at retirement are taxable. 

Conversely, contributions to a Roth IRA are not tax-deductible, but withdrawals (under certain conditions) are tax-free.

This choice has a direct impact on your tax situation at retirement. A saver in a high tax bracket today, but expecting lower income in retirement, is well advised to opt for a traditional IRA. 

Conversely, a young taxpayer in a low or stable bracket will often benefit more from a Roth. Ignoring this distinction can result in significant tax losses over the long term.

2. Waiting too long to contribute

Many savers wait until the tax deadline (usually mid-April) to make their IRA contributions. Yet the earlier in the year you contribute, the more room your capital has to grow thanks to the effect of compound interest.

Delaying your contributions, year after year, seriously limits the growth potential of your retirement savings.

In a retirement planning context, every month counts: investing in January rather than April can generate thousands of extra dollars over thirty years.

3. Leaving funds uninvested

An underestimated mistake with far-reaching consequences is leaving money in an IRA account without investing it. 

Contrary to popular belief, money put into an IRA does not automatically earn a return. It must be actively invested in assets like stocks, bonds, index funds and so on.

An uninvested IRA is tied-up capital, exposed to currency erosion. Many individuals discover too late that their money has been sitting in cash for years, without generating the slightest interest. 

This mistake seriously compromises long-term growth objectives linked to retirement.

4. Making an early withdrawal

Withdrawing funds from an IRA before the age of 59 and a half entails, with certain exceptions, a 10% penalty, in addition to ordinary taxation. 

This may happen in the event of a financial emergency, but such a decision can do lasting damage to your retirement strategy.

Retirement savings must remain capital dedicated to the long term. Using an IRA as an emergency reserve means sacrificing part of your right to future peace of mind. The best protection is to set up an independent emergency fund outside your retirement accounts.

5. Exceeding contribution limits

In 2025, the annual contribution limit to an IRA is set at $7,000 ($8,000 for people aged 50 or over). 

Contributing more than this will result in a 6% tax penalty on the excess amount, each year for as long as the excess remains uncorrected.

This kind of error can occur when contributions are made to several accounts, or when income changes during the year.

To avoid this, we recommend rigorous monitoring of your payments, in conjunction with a financial or tax advisor.

6. Executing a rollover incorrectly

It's common practice to transfer funds from a 401(k) or an old IRA to a new account. But an indirect rollover, mishandled, can be considered a taxable withdrawal if the funds aren't redeposited into another account within 60 days.

Many errors occur when a saver receives a cheque in his or her name and delays reinvesting it. 

The safest solution is to opt for a direct rollover, in which funds are transferred directly from one administrator to another. 

This type of transfer is not considered taxable, provided it is well structured.

7. Forget mandatory distributions

From age 73 onwards, holders of a traditional IRA are required to withdraw an annual minimum, called Required Minimum Distribution (RMD). 

These amounts are taxable, and failure to take them can result in a 25% penalty on the amount not withdrawn.

RMDs must be integrated into your retirement planning strategy. A well-planned withdrawal can help you avoid a tax hit, or even reinvest in other vehicles (Roth IRA, after-tax account) if you don't need the funds to live on.

8. Neglecting to update beneficiaries

The beneficiaries designated on an IRA take precedence over the wishes expressed in a will. In the event of your death, the sums paid out will revert directly to the people named, regardless of changes in your personal situation.

Failing to update your beneficiaries after a divorce, marriage or birth can create real family dramas. 

Worse still, failing to designate a beneficiary means that the account passes through the estate, with serious tax and administrative consequences.

9. Not taking advantage of charitable distributions

From the age of 70 and a half, it is possible to donate up to $108,000 (in 2025) directly from your IRA to charity, via a Qualified Charitable Distribution (QCD). 

This type of donation reduces taxable income and can satisfy RMD obligations.

It's a little-known strategy, but particularly advantageous for retirees who don't need their RMDs to live, and wish to support a cause. It reduces adjusted gross income without having to itemize deductions.

10. Assuming a 401(k) is enough

Finally, many employees think their 401(k) is enough to cover their future needs. This is a strategic mistake. IRAs often offer more investment flexibility and can effectively complement a company plan.

Ideally, as part of a comprehensive retirement planning strategy, employees should first contribute to their 401(k) until they reach their employer-matched contribution level, and then fund an IRA.

This approach maximizes the tax benefits and diversification of your investments.

Conclusion

Individual Retirement Accounts (IRAs) are invaluable tools for building a solid retirement portfolio. But they require constant attention, a good understanding of tax rules, and rigorous planning. 

At a time when Social Security alone no longer guarantees a comfortable standard of living in retirement, it's crucial to make the most of IRA accounts, avoiding the common mistakes presented here.

Working with a financial advisor can help you implement a coherent strategy, optimize your choices between IRA, Roth IRA, and 401(k), and navigate an increasingly complex tax environment. When it comes to retirement savings, mistakes are costly – and vigilance pays off.