IRA Mistakes That Are Quietly Costing You Thousands

By Jack Strulowitz

According to the U.S. Department of Labor, approximately half of retirement account holders have not completed a beneficiary designation form. And among those who do, many have not updated it, even after major life events like marriage, divorce, or the birth of children. That means if something were to happen, their IRA funds may not go where they want them to go or think they’re going.

And that’s just one mistake. There’s a difference between having and contributing to an IRA and actually using it well, and that difference is where real money gets left on the table. Let’s walk through the mistakes I see most often.

The Beneficiary Designation Problem

No matter how much you paid your attorney or what your will says, your IRA beneficiary designation is what controls where the money goes. There are countless cases of ex-spouses inheriting IRAs simply because no one updated the beneficiary form after a divorce.

And since the SECURE Act of 2019 changed the rules so that most non-spouse beneficiaries now have to drain an inherited IRA within 10 years (instead of stretching it over a lifetime), your named beneficiary and how you structure it matters more than ever. This is a five-minute task that can save your family years of headaches.

Putting the Wrong Investments in the Wrong Accounts

This one is worth paying attention to because it’s not even a mistake most people make on their own. Sometimes it’s a financial advisor making it for them.

I was once reviewing a new client’s existing portfolio and noticed their previous advisor had invested some of their IRA money into municipal bonds. If you’re not sure why that’s a problem, the entire appeal of municipal bonds is that their interest is tax-free. But everything inside a traditional IRA is already tax-deferred, and gets taxed as ordinary income when you pull it out. So, you’re taking a bond that pays a lower yield specifically because of its tax advantage, sticking it in an account that strips away that advantage, and then paying full tax on it anyway. It’s like using an umbrella indoors.

The same logic works in reverse. If you’re holding investments that throw off a lot of taxable income (think REITs, high-yield bonds, actively managed funds that distribute capital gains) those belong inside your IRA where the tax hit is deferred. Your taxable brokerage account is better suited for tax-efficient investments like ETFs or stocks you plan to hold long-term, where you control when you realize gains.

This is what people in the industry call “asset location,” as opposed to asset allocation. Where you hold something matters just as much as what you hold.

Contributing to the Wrong Type of IRA

Traditional or Roth? The answer isn’t always obvious, and it’s definitely not the same for everyone. The conventional wisdom says that if you’re in a high tax bracket now, go traditional (deduct now, pay later). If you’re in a lower bracket, go Roth (pay now, enjoy tax-free growth). That’s fine as a starting point, but it misses something important.

Warren Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” A Roth IRA is that tree. If you’re relatively young and your income is still growing, paying tax now on a smaller amount for the growth potential of tax-free compounding can be enormously powerful, even if the deduction from a traditional IRA feels better in April. The math often favors the Roth for younger earners, but the upfront tax savings from a traditional IRA carry real weight too.

Forgetting About the Spousal IRA

This one comes up a lot. If one spouse isn’t working, a lot of people assume that spouse can’t contribute to an IRA, but that’s not the case. As long as the working spouse has enough earned income, you can fund a spousal IRA. That means a couple could be putting away $14,000 a year in IRAs, or $16,000 if both spouses are 50 or older.

It’s one of the easiest, most overlooked moves in retirement planning. Two IRAs compounding over 20-40 years versus one. That makes a massive difference over the long term.

The Bottom Line

None of these mistakes are dramatic. Nobody gets a letter in the mail saying “You just lost $200,000.” They compound slowly in the wrong direction. But the people who catch them, who take the time to actually look under the hood once in a while, tend to end up in a very different place than those who don’t. The good news is that every one of these mistakes is fixable. The sooner you catch these mistakes, the less they cost you. n

Jack Strulowitz is a Financial Advisor at Bernath & Rosenberg in Cedarhurst, NY, where he helps high–net worth individuals and families manage their investments and build comprehensive strategies for retirement, tax, and estate planning. For questions or to schedule a consultation, please contact [email protected] or 847-962-3352.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss. This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to 59 1/2 may result in a 10% IRS penalty tax in addition to current income tax. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.