5 Critical Steps Roth IRA Investors Often Miss
Written by
Kerra Bolton
Edited by
Rebekah Evans
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Opening a Roth IRA is a smart financial move, but it’s easy to get wrong. From skipping key setup steps to making costly investment mistakes, even well-meaning investors can sabotage their growth.
Here are critical steps for Roth IRA investors that they often miss.
Not Checking Income Limits
Many investors open a Roth IRA without checking the income limits.
“The most common mistake I see is people opening Roth IRA accounts without qualifying due to the higher modified adjusted growth income limits (MAGI),” said Ronnie Gillikin, president and CEO of Capital Choice of the Carolinas. “Be sure to check with the income limits before opening the account.”
Funded, Not Invested
One of the most overlooked mistakes is assuming that depositing money into a Roth IRA means it’s invested. Without selecting specific investments, contributions sit in cash while investors miss out on compound growth.
“Just leaving the money sitting in a cash-equivalent or default sweep account is like putting a car in the garage and hoping it’s on its way to a destination,” said Sara Levy-Lambert, personal finance strategist and head of growth at RedAwning.
“I’ve witnessed young professionals, particularly those in high-output corporate jobs, join in the with the sense they’ve ‘checked the box’ after they’ve contributed, not realizing their money isn’t even assigned to any assets,” said Levy-Lambert. “One client didn’t even discover for two years that her Roth contributions weren’t invested. She missed out on inertia for two bull market years.”
Short-Term Tax Thinking
One often-overlooked factor in Roth IRA planning is one’s future tax bracket.
Kevin Quinn, estate planning attorney at Legacy Counsellors, PC, said investors should consider partial Roth conversions or new Roth contributions if their required minimum distributions (RMDs) in their 70s or 80s could push them into a higher tax than they are today.
“It also greatly helps with estate planning because the Secure Act requires all IRAs to be liquidated within 10 years of death unless it’s going to a spouse,” Quinn said. “The heirs pick up a significant income tax burden when inheriting an IRA. The Roth IRA is not taxed to your heirs and can grow income tax-free after your death.”
Overlooking Alternatives
Another common mistake investors make is thinking a Roth IRA should only hold traditional assets like stocks and bonds.
“You can also invest in gold, silver, platinum and palladium as long as it meets purity requirements such as 99.5% purity for gold and 99.9% purity for silver and is produced by IRS-approved refiners,” said David Beahm, president and CEO of Blanchard and Company, a rare coin and precious metals firm.
“Like any other Roth IRA, a gold IRA gets you tax-free growth and withdrawals after you’re 59.5 years old, as long as the account is at least five years old,” Beahm explained. “Additionally, it helps you diversify your retirement investments so you’re not too reliant on the stock market in the event of a downturn.”
Portfolio Drift
Even if investors have strong initial picks, failing to revisit and rebalance their portfolio over time can lead to unintended risk. For example, market shifts can cause one’s asset mix to drift and potentially undermine their original investment strategy.
“If you allocated 70% to stocks and 30% to bonds, but your stocks grew 12% in a year while bonds only grew 3%, your stocks allocation would end up going over 70%,” said Yehuda Tropper, CEO of Beca Life Settlements.
“Over time, your investment goals (conservative, moderate, aggressive) might get out of alignment with your actual allocation,” Tropper added.
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