Top 10 Roth IRA Mistakes to Avoid in 2025 (And How to Fix Them)

Many savers, from beginners to experienced investors, overlook crucial details that can trigger steep penalties, limit tax-free growth, or disqualify them entirely.

​Introduction: Why Your Roth IRA Strategy Needs an Upgrade
The Roth IRA is arguably the most powerful retirement account available to most Americans. Contributions go in after-tax, but the money grows 100% tax-free and withdrawals in retirement are also tax-free—making it a perfect shield against future tax hikes.

However, the powerful tax benefits of the Roth IRA come with a set of strict rules. Many savers, from beginners to experienced investors, overlook crucial details that can trigger steep penalties, limit tax-free growth, or disqualify them entirely.

If you’re serious about maximizing your tax-free retirement income, you need to understand the rules of the road. Here are the top 10 most common Roth IRA mistakes our financial planners see, broken down into key areas: Contributions, Investment, and Withdrawals.

Segment 1: Contribution Mistakes (The IRS Trap)
These errors often stem from ignoring the annual limits and eligibility requirements set by the IRS.

Mistake 1: Exceeding the Roth IRA Income Limits
Unlike a Traditional IRA, the Roth IRA is not available to everyone. Your ability to contribute is based on your Modified Adjusted Gross Income (MAGI). If you earn too much, your contribution may be reduced or eliminated entirely.

Roth IRA Eligibility Based on MAGI (2025 Tax Year)
Your filing status determines your eligibility to make contributions:

• For Single Filers, Head of Household, or Married Filing Separately (if you did not live with your spouse in 2025):
  • You can make a full contribution if your MAGI is less than $150,000.
  • You can make a partial, reduced contribution if your MAGI falls between $150,000 and $165,000.
  • You cannot contribute if your MAGI is $165,000 or more.
• For Married Couples Filing Jointly or Qualifying Widows/Widowers:
  • You can make a full contribution if your MAGI is less than $236,000.
  • You can make a partial, reduced contribution if your MAGI falls between $236,000 and $246,000.
  • You cannot contribute if your MAGI is $246,000 or more.
• For Married Couples Filing Separately (if you lived with your spouse at any point in 2025):
  • You can only make a partial contribution if your MAGI is less than $10,000. If your MAGI is $10,000 or more, you generally cannot contribute.

How to Fix It: If you find yourself in the phase-out or no-contribution range, you may need to look into the Backdoor Roth IRA strategy (see Mistake 6) or consult a tax professional.

Mistake 2: Ignoring Annual Contribution Limits
Whether you make the maximum contribution or not, your total contribution to all of your IRAs (Roth and Traditional combined) cannot exceed the annual maximum.

• 2025 Contribution Limit (Under Age 50): $7,000
• 2025 Catch-Up Contribution (Age 50 and older): $8,000 total

Mistake 3: Contributing Without Enough Earned Income
A fundamental requirement for any IRA contribution is that it must be supported by earned income. Unearned income sources like interest, dividends, rental income, or pensions do not count. You cannot contribute more than you earned that year.

• Example: If you are under 50 and earned $5,000 in wages for the year, you can only contribute up to $5,000 to your Roth IRA, even though the official limit is $7,000.

Segment 2: Investment & Planning Mistakes
These errors can cost you hundreds of thousands in potential tax-free investment growth over a lifetime.

Mistake 4: Allowing Contributions to Sit in Cash
The greatest benefit of the Roth IRA is the ability for the earnings to grow and be withdrawn tax-free. If you leave your contributions in a low-interest cash account, you are effectively wasting the tax-advantaged wrapper.

• Strategic Fix: A Roth IRA is best utilized by investing in aggressive, high-growth assets (like stocks or equity funds) because the highest growth is where the tax benefit is maximized.

Mistake 5: Failing to Utilize the Spousal IRA
If you are married and file jointly, and your spouse does not work (or has low earned income), you can still fund a separate Roth IRA for them. As long as the working spouse has enough earned income to cover both contributions, you can double your annual tax-free savings.

Mistake 6: Ignoring the "Backdoor Roth IRA" (High-Income Earners)
If your income is above the phase-out limits (Mistake 1), you cannot contribute directly. However, the IRS allows a workaround:

1. Contribute to a non-deductible Traditional IRA (no income limit).
2. Immediately convert those funds to a Roth IRA.

This is a legal, widely-used strategy, but be warned: if you hold any pre-tax funds in any Traditional, SEP, or SIMPLE IRA, you must understand the Pro-Rata Rule to avoid a significant tax bill on the conversion. Consult a financial advisor or tax professional before attempting this.

Mistake 7: Forgetting the 6% Excess Contribution Penalty
If you accidentally contribute more than your eligible limit (either the annual limit or your earned income limit), the IRS imposes a stiff 6% penalty on the excess amount for each year it remains in the account.

• The Fix: You must proactively remove the original excess contribution plus any earnings it generated by the tax-filing deadline (including extensions) to avoid the annual penalty.

Segment 3: Withdrawal Mistakes (The 5-Year Rule)
The withdrawal rules for a Roth IRA are complex. Making a mistake here can turn tax-free earnings into a taxable event with a 10% penalty.

Mistake 8: Misunderstanding the 5-Year Rule
For your earnings to be withdrawn tax-free, the Roth IRA must have been open for at least five years (starting the year of your first contribution) and you must meet a qualified reason for withdrawal.

• Note: Your original contributions can be withdrawn at any time, for any reason, without tax or penalty. This is a key benefit and often misunderstood.

Mistake 9: Withdrawing Earnings Before Age 59½
This is the second half of the qualified distribution rule. To take earnings out tax-free and penalty-free, you must be age 59½ or older (or meet a qualified exception, such as a first-time home purchase, disability, or death). Failing this rule means the earnings may be subject to ordinary income tax and a 10% early withdrawal penalty.

Mistake 10: Missing Conversion Opportunities in Low-Income Years
While not a technical mistake, this is a major planning oversight. If you have significant funds in a Traditional IRA or 401(k), converting a portion to a Roth IRA creates a future tax-free income stream. This conversion is taxed as ordinary income in the year it occurs.

• The Smart Strategy: If you have a year where your income is temporarily low (e.g., a gap between jobs, self-employment slowdown, or early retirement), your tax bracket will be lower. This is the ideal time to execute a Roth conversion, paying the taxes at a lower rate to secure tax-free growth forever.

Summary & Key Takeaways
The Roth IRA is a powerful tool, but like any sophisticated financial instrument, it demands attention to detail. To ensure you harvest its full tax-free potential, prioritize these three actions:

1. Check Your MAGI: Before contributing, confirm you are within the 2025 income limits or plan for a Backdoor Roth conversion.
2. Invest Aggressively: Don't let your contributions sit in cash; invest for maximum long-term, tax-free growth.
3. Respect the 5-Year Rule: Understand that while contributions are liquid, the valuable tax-free earnings are locked away until your account is five years old AND you are 59½.​

​Check out our video on this below!

​⚠️ IMPORTANT EDUCATIONAL DISCLAIMER
This content is for informational and educational purposes only and should not be considered specific tax, legal, or investment advice. Tax laws are complex and change frequently; you should consult with a qualified financial advisor, tax professional, or legal counsel regarding your individual situation before making any decisions.