I’m a Financial Expert: This is the No. 1 Mistake Americans Make With Their Roth IRAs
Written by
Kerra Bolton
Edited by
Zuri Anderson
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Roth IRAs are one of the most powerful tools for retirement savings, offering tax-free growth and tax-free withdrawals in retirement.
Despite their benefits, many Americans fail to use them to their full potential.
According to financial experts, the number one mistake is playing it too safe by choosing conservative investments that limit growth and undermine the Roth’s biggest advantage.
When Safe Isn’t Smart
Roth IRAs are funded with after-tax dollars, which means all qualified withdrawals, including investment earnings, are tax-free in retirement. Therefore, experts said the Roth is best used for growth-oriented investments, not conservative ones.
“The most common Roth IRA mistake I see is investors using conservative assets in their Roth accounts,” said Tim Witham, a certified financial planner and CEO of Balanced Life Planning LLC.
Investing too conservatively limits long-term returns and can undercut the entire benefit of the Roth structure. If the account isn’t growing, the tax-free advantage is effectively wasted.
The Hidden Mistake
Whitman said one reason this mistake is so common is that many investors, and even advisors, apply the same asset allocation to every account, rather than taking a portfolio-wide approach.
“In general, an investor’s most aggressive asset should be placed in a Roth IRA in order to maximize the tax-free growth potential,” Witham said.
He explained, “By placing conservative assets in a Roth account, it can reduce the benefit of contributing to a Roth, to a point where you could potentially see more benefit by making a pre-tax contribution rather than a Roth contribution.”
Witham said it often comes down to convenience. He said many advisors still rely on outdated tools that don’t fully account for asset allocation.
“To fix this, investors should prioritize risk assets, like stocks in Roth IRAs, and adjust their asset allocation accordingly across their portfolio,” Witham said. “For more conservative investors, it may be worth analyzing if pre-tax contributions could provide a better after-tax return. If you’re working with or selecting an advisor, ask about their plan for asset location.”
More Mistakes To Avoid
While being too cautious is the most common misstep, several other mistakes can also keep savers from maximizing their Roth’s potential:
Letting Roth Contributions Sit in Cash
Another surprising mistake is fully funding a Roth IRA, but never actually investing the money. Instead, investors should choose investments they feel good about growing far into the future or those that are tied to the S&P Index, said Lucas Barcelo, a financial coach at Thrivin’ Life.
Treating All Accounts the Same
“It’s an easy oversight because many investors focus on maintaining a consistent allocation based on their risk profile, rather than optimizing for tax efficiency across account types,” said Robert Rickey, a certified financial planner at StraightLine.
Ignoring Roth Conversions
Failing to use Roth IRA conversions, even in small amounts, is a common mistake that can lead to higher taxes over time, said Bruce Maginn, a certified financial planner at Solomon Financial.
Even partial conversions from traditional retirement accounts can spread out tax liability and build tax-free wealth for the future.
Overdoing Roth Conversions
Roth conversions can be a valuable tax strategy, but overdoing them is a common mistake.
Aaron Brask, an independent investment advisor at Aaron Brask Capital, said converting too much in a single year can push individuals into higher tax brackets and create an unnecessary tax burden.
Misunderstanding Withdrawal Rules
Early withdrawals of earnings can result in taxes and a 10% penalty, unless an exception applies. Individuals can prevent early withdrawals by not taking distributions from their Roth accounts until they need them, said Alex Alonso, a financial advisor and vice president at Sykon Capital.
“To cover short-term liabilities and properly manage cash flow, a financial planner can balance different savings buckets,” Alonso said. “This can help prevent the need to pull out of Roth accounts early.”
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Sources:
- Tim Withman, Balanced Life Planning LLC
- Lucas Barcelo, Thrivin’ Life
- Robert Rickey, StraightLine
- Bruce Maggin, Solomon Financial
- Aaron Brask, Aaron Brask Capital
- Alex Alonso, Sykon Capital
