There's no other retirement account quite like the Roth IRA. With the opportunity to earn tax-free income on your investments for your entire career, no other tax break comes close to the potential savings that the Roth IRA delivers. If you want to use Roth IRAs effectively, you have to know how they work and what pitfalls you can inadvertently fall into along the way. By avoiding bad moves like the ones below, you can take full advantage of Roth IRAs without losing any of the advantages they offer to retirement savers.

1. Paying more taxes on Roth conversions than you should

Those with extensive assets in traditional retirement accounts often look at converting all or a portion of their holdings to a Roth IRA. That gives them the benefits of tax-free treatment going forward, but it comes at a cost: paying taxes on the amount you convert from the traditional retirement account. That cost is well worth it for many, but what many people miss out on is the ability to cut taxes on the Roth conversion by using the strategy known as recharacterization.

Recharacterizing a Roth conversion essentially involves getting a do-over on the whole process. Working with your financial provider, you arrange to put the converted money back into its original traditional retirement account. For tax purposes, the IRS treats you as never having made a Roth conversion at all. You have until the extended tax deadline for the tax year in which you made the conversion to complete the recharacterization process.

If the value of your Roth investments goes down in the period immediately after you convert, then doing a recharacterization can save you on your taxes. As a simple example, if you convert a $100,000 regular IRA to a Roth and then the value of the Roth assets falls to $80,000, then you'd have to pay taxes on the full $100,000 amount. If you recharacterize, then the $80,000 goes back into the regular IRA, and you pay no taxes at all. After a short waiting period, you can then do a Roth conversion again, but this time you'll just have to pay taxes on the new $80,000 amount. Reducing your taxable income by $20,000 will save you thousands on your return.

Choosing between IRA and Roth.

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2. Misunderstanding key Roth IRA rules

Tax-free income in a Roth is great, but you have to follow the rules to get it. One particular pair of Roth IRA rules is especially confusing because they both apply to a five-year period but have different implications.

To comply with the first rule, you have to keep your money in a Roth IRA for five years before you can take earnings on the IRA's investments out of the account on a tax-free basis. What's confusing is that this rule applies even if you reach the normal IRA retirement age of 59 1/2. As an example, if you opened your first Roth IRA in 2017 at age 58, then you'd have to wait to make tax-free withdrawals of Roth IRA earnings until 2022 -- even though you'd turn 63 that year. Keep in mind that you can still take out the amount you initially contributed on a tax- and penalty-free basis; it's just the income on those contributions that is subject to the rule.

If you converted a retirement account to a Roth, then another rule takes effect. You can't withdraw money from a converted Roth within the first five years without paying a 10% penalty, unless you qualify for various exceptions to the IRA penalty provisions. This rule applies to each conversion separately, so it's important to keep track if you do repeated conversion transactions in an effort to manage their tax impact.

3. Incurring unnecessary excess contribution penalties

Only those who meet the maximum income requirements can make Roth IRA contributions. For single filers in 2017, those with adjusted gross income above $118,000 lose a portion of their maximum annual Roth contribution, while those making more than $133,000 can't contribute at all. The corresponding figures for joint filers are $186,000 and $196,000, respectively.

Where things get complicated is that you won't always know when you make a Roth IRA contribution what your full-year earnings will be. If you get a raise or bonus late in the year after you've already made contributions, then you can run afoul of the rules retroactively and seem to be stuck. If you don't take action, you'll owe a 6% penalty on the amount of excess contributions each year until you fix the problem.

There's an easy solution to this problem. The IRS lets you take out the excess contribution without penalty as long as you do so before the extended due date for the tax return in the tax year for which you made the Roth contribution. That gives you plenty of time to remedy the situation, but it's important not to forget about it entirely.

Be smart with your Roth IRA

Making sure you avoid mistakes with Roth IRAs is essential to unlock their full value. By knowing about these potential problems, you can avoid them in advance and take care of any issues that might arise with your retirement accounts.