Are You Making These Common Roth IRA Contribution Mistakes?

Opening a Roth IRA with a brokerage firm can be a great move for your long-term financial security. That's because Roth IRAs give you long-term tax-free growth, and tax-free withdrawals when you retire or use the money for some other qualifying purposes.

But deciding when and how to put money into a Roth IRA is not always simple. Let's look at the biggest Roth IRA contribution mistakes and see how you can avoid them.

1. Contributing to a Roth IRA if your income is too high

Not everyone is allowed to use a Roth IRA -- there are some income limits. If you're a high earner, you might make too much money to be allowed to get the tax advantages of a Roth IRA.

Under IRS rules for 2024, single filers with a modified adjusted gross income (AGI) of less than $146,000, and married couples filing jointly with modified AGI of less than $230,000, can contribute the full amount to a Roth IRA. If your income is above these limits, you are in the "phaseout range," which means you can make a partial contribution to your Roth IRA, but not the full amount.

You need to have a pretty high income before you have to worry about being ineligible for a Roth IRA. But before you make plans to contribute to a Roth IRA, make sure you're allowed to do it. If your income is over six figures or you're getting a big pay raise this year, you might want to check on the limit and see if you're on track to qualify for a Roth in 2024.

2. Forgetting to use catch-up contributions (if you qualify)

Are you age 50 or over? If so, congratulations -- the IRS is giving you a special gift to help save more money for retirement. This gift is called a "catch-up contribution," and it means you are allowed to save an extra $1,000 per year in your IRA (Roth or traditional). With a catch-up contribution, age 50-plus retirement savers can put $8,000 into a Roth IRA in 2024.

If you're eligible for this extra savings boost, be sure to take advantage of it. If you're 50 years old, invest $8,000 per year in your Roth IRA, and earn 8% average annual returns for the next 15 years, you'd have $234,594 at age 65.

But if you only invested $7,000 per year (with no catch-up contribution) for 15 years, with the same 8% rate of return, you'd only have about $205,270. Saving that extra $1,000 per year could give you an extra $29,324 after 15 years -- making that catch-up contribution worth an extra $2,000 per year!

3. Putting too much money into your Roth IRA

It's exciting to open a Roth IRA, but be careful not to exceed the contribution limits. If you put too much money into your IRA, you will have to withdraw it -- or face potential tax penalties of 6% per year.

This makes it important to understand the IRA income limits. If you're a high earner whose income is close to the phaseout limit, crunch the numbers and make sure you're actually eligible for a Roth IRA before you move money into one.

4. Putting more than $7,000 into a Roth IRA and traditional IRA

Remember that the IRS rules for IRA contribution limits include Roth IRAs and traditional IRAs. For 2024, people under the age of 50 are allowed to put up to $7,000 into all IRAs combined -- not $7,000 into a Roth and $7,000 into a traditional IRA.

If you want to put money into a traditional IRA and Roth IRA, that's totally fine. But the total amount must add up to $7,000 or less (or $8,000 if you're age 50-plus). So you could put $2,000 into a Roth IRA and $6,000 into a traditional IRA, or split the money 50/50 between both accounts.

But be aware that not everyone is allowed to make tax-deductible contributions to a traditional IRA -- there are income limits based on your filing status and whether you or your spouse are covered by a retirement plan at your job.

5. Using a Roth IRA when you're in a high tax bracket

Roth IRAs are not the right choice for every person at every stage of life. The idea of putting money into a Roth IRA is that you expect your tax rate in retirement to be higher than it is today. With a Roth, you have to pay taxes on the current year's income that you contribute to the Roth IRA, but you then get tax-free growth and tax-free withdrawals in retirement.

If you're 25 years old and in the 12% tax bracket, opening a Roth IRA is a great choice -- at this age and stage of your career, your taxes might be as low as they will ever be again. But if you're 45 years old and in the 24% tax bracket, you might prefer to get a tax deduction by using a traditional IRA. Or split your contributions with $3,500 into a traditional IRA, and $3,500 into a Roth IRA. That way you get some immediate tax relief on this year's tax return, and some long-term tax-free gains for your future retirement.

Using a Roth IRA is mostly a matter of understanding the IRS rules and limits. If you're a higher earner, double check the income limits and fine print. But if you qualify, putting money into a Roth IRA can help you maximize your retirement savings.