5 Most Common Roth IRA Mistakes

Hey everyone, welcome to We're Talking Money. It's another short take, and we're looking forward to sharing a little information about Roth IRAs, more importantly the five most common mistakes that we see. But first, what is a Roth IRA?

So a Roth IRA is a qualified account, much like what you would be thinking of an IRA or a 401k. And that account, unlike a traditional IRA, grows tax-free, and those funds can be distributed to you in retirement tax-free, and if you leave those funds to a loved one should you pass away, tax-free. So this thing has a huge win written all over it. We're going to talk about the five most common mistakes. Dustin, what's the first one?

Mistake number one, and this is what we see, is not starting it early enough. There's no age limit on a Roth IRA. The only requirement for a Roth IRA is that you have to have ordinary income. You can put 100 of your income up to 6 000. So that means even kids that might be working on their family's payroll.

By the way, Cadbury, how much stock do I own?

If you've got income, you can have a Roth.

Mm-hmm. Very, very powerful. Consult with your CPA first.

Second mistake, it's not being familiar with the rules of a Roth.

Have an aneurysm, why don't you.

There are certain rules that one must abide by. There's a lot of them. What are the ones that are probably the most important?

So when can you start taking from a Roth IRA? You can take from it when you're 59 and a half, just like anything else. But you can also take from a Roth as a first-time home buyer. It's every two years that you've not owned a home, you're now going to qualify as a first-time homeowner. But if you don't need to get to that money, you are building wealth in a true tax-free environment.

Another rule is that you can always touch your contributions. You can pull what you put in out. You just don't want to touch those earnings until you're 59 and a half years old. That's when the penalties would kick in if you did it prior to 59 and a half. But your basis, what you put into that Roth, Dustin's right, you can always get that out.

Point three, not being aggressive enough with the investments, or maybe not even investing the money at all. There's been times in my career where I've seen people have Roth IRAs and they've been sitting in cash.

Compounding interest, eighth wonder of the world, Albert Einstein said that. You want it working for you. And over 30 40 years, a couple of percentage points, depending on how aggressive you want to be and what you're invested in, could be hundreds of thousands if not millions of dollars. Don't miss opportunity.

We see that not just in the Roth, we see that across the board. It's one of the most common investor mistakes, period. What about number four?

This is by far, I think, the most common: believing that you make too much money to contribute to a Roth.

What a mistaken belief.

People think that's the case because if you make over a certain amount, the IRS says you can't get into a Roth. Well, the rules don't necessarily apply the way people interpret them. You can put money in a Roth, but you might have to use a back door method to do it. You might have to drop it into an IRA first, and then nothing in the rules from the IRS say that you can't immediately transfer that to a Roth IRA, and we call that a back door.

You don't have a 401k with a Roth provision, you need to ask your employer why. You should have that.

So the last and final mistake that we see is pulling the Roth IRA out first in retirement. Sure, it can certainly feel good because you can pull it all out and not have to worry about anything from Uncle Sam. But the flip side is, after age 72 there's also no required minimum distributions on a Roth IRA, so this money can continue to grow and compound forever.

Five is, to me, one of the most important, because so many times people don't run the math. And the fact is, if you're in a high tax bracket, you hit 72 and you've got these mammoth required distributions, you're going to be giving Uncle Sam a minimum of 30 percent, a case like that, maybe more. So yes, consider your tax situation. Yes, that has to go into the calculation. But generally speaking, for most retirees, no more earned income, you want to start using those taxable dollars first. Save those tax-free dollars, let them grow and grow and grow, because that money never gets taxed, whether it's to you or to your heirs. Powerful combination.

Thanks for watching We're Talking Money short takes. Hope these five common Roth IRA investment mistakes were helpful. Do not make those mistakes yourself.

Thanks for joining us on We're Talking Money. If you'd like to learn more, check us out at omnistarfinancial.com. Subscribe to the show on YouTube, follow us on Instagram and Facebook. Tell us in the comments section what topics you'd like to hear in upcoming videos. If you enjoyed the show, give it a thumbs up and share it with friends.