3 IRA Mistakes You Might Regret for Years

Don't fall victim to these.

A lot of people save money for retirement in a 401(k) plan they get access to through an employer. But that may not be an option for you.

Maybe you work for a smaller company that doesn't have a 401(k). Or maybe you went freelance during the pandemic and as such, now work for yourself rather than just a single employer.

If that's the case, you're by no means out of luck, because you can save for retirement in an IRA. As long as you have earned income, you can contribute to an IRA up to an annual limit that can change from year to year. But you're going to want to avoid these common mistakes that IRA savers often fall victim to.

1. Not maxing out when you can

Right now, the annual contribution limit for IRAs is $6,000 if you're under the age of 50 and $7,000 if you're 50 or older. Now if you're barely earning enough to cover your essential bills, it might be a struggle to squeeze out so much as $500 for your IRA. But if you're doing well financially and you already have a fully loaded emergency fund, you shouldn't hesitate to max out your IRA.

First of all, the more money you put into your IRA, the more of a nest egg you might retire with. But also, traditional IRA contributions get special tax treatment. If you put $6,000 into an IRA, the IRS won't tax you on $6,000 of earnings. So to some degree, your contribution will pay for itself.

2. Taking an early withdrawal

The money in your IRA should be earmarked for retirement, and the IRS wants that money left alone until age 59 ½. As such, you'll be penalized for taking an early withdrawal unless you qualify for an exception.

One exception is that you can take a $10,000 IRA withdrawal at any age for a first-time home purchase. But while that might seem like a tempting way to top off your down payment, it's a move you might regret if it leaves you short on money down the line, when it's time to retire.

3. Investing too conservatively

The great thing about IRAs is that they let you invest in individual stocks -- something your 401(k) generally won't let you do. But one thing you shouldn't do is invest conservatively by loading up on bonds. Though they're less risky than stocks, generally speaking, they also tend to generate lower returns.

A $100,000 IRA balance might grow into $219,000 over 20 years at an average yearly 4% return, which is what you might get with a bond-heavy investment mix. With a stock-heavy mix, you might enjoy twice that return -- and a $466,000 nest egg instead. And if you're worried about taking on the risk of stocks, remember that with an IRA, you're investing over many decades. That's a much less risky prospect than buying stocks with the hopes of cashing out within a couple of years.

An IRA could be a great home for your nest egg. Just make sure to avoid these blunders so you don't have any regrets once retirement rolls around and you need to start tapping that account to cover your living expenses.