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Traditional IRAs are one of the smartest tools in your retirement toolbox. They offer tax perks, flexible investment choices, and the magic of compounding returns over time. Plus, once you hit 50, you can play catch-up with larger contribution limits. No wonder nearly half of U.S. households reported owning at least one IRA in 2024.
But just like any powerful financial tool, IRAs come with rules—and when you break them, even by accident, the IRS is quick to penalize. Fortunately, most common mistakes are easy to sidestep once you know what to watch for. Let’s break down the five most frequent slip-ups and how to steer clear of them.
1. Going Over the Contribution Limit
The IRS sets annual contribution limits for IRAs, and going over them is a costly mistake. In 2025, the max you can contribute to a traditional IRA is $7,000—or $8,000 if you’re 50 or older. Go beyond that, and you’ll owe a 6% penalty on the excess every year it stays in your account.
Say you accidentally add $1,000 too much and don’t realize it for two years. That’s $120 in penalties—money that could have been working for you instead.
How to avoid it: Automate your contributions. Set up a monthly deposit of $583.33 if you’re aiming for the $7,000 annual limit. It’s an easy way to stay within the limit without having to think about it.
2. Cutting It Too Close to the Deadline
You have until the tax-filing deadline—usually April 15—to make contributions for the previous year. But waiting until the last minute is risky. Besides the stress, you’re giving your money less time to grow.
How to avoid it: Break up your yearly contribution into monthly or quarterly chunks—or knock it out early with a lump-sum contribution. Not only does this reduce the risk of forgetting, but it also gives your money more time to benefit from market gains.
3. Getting Rollovers Wrong
When you leave a job and move your retirement funds into a traditional IRA, the transfer needs to be done correctly. The IRS offers two ways to do this without tax headaches:
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Direct transfer: The safest and easiest route. Your old provider sends the funds straight to your new IRA.
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Indirect rollover: You receive a check and have 60 days to deposit the full amount into your IRA. Miss that window, and you’ll pay income tax—and potentially a 10% early withdrawal penalty if you’re under 59½.
How to avoid it: Stick with a direct transfer whenever possible. If you must do it indirectly, mark your calendar immediately and don’t delay.
4. Dipping In Too Early
Unless you qualify for a specific exception, taking money out of your IRA before age 59½ means a 10% early withdrawal penalty plus income taxes. It’s your money, but Uncle Sam takes a serious cut if you pull it out too soon.
How to avoid it: Keep a separate emergency savings account with 3–6 months of living expenses. That way, you’re not tempted to tap your IRA when life throws you a curveball.
5. Forgetting About Required Minimum Distributions (RMDs)
Once you hit a certain age (currently 73, depending on your birth year), the IRS requires you to start withdrawing from your traditional IRA. If you don’t? They’ll hit you with a steep penalty—25% of the amount you should’ve taken.
If your RMD was $20,000 and you forgot? That’s a $5,000 fine.
How to avoid it: Set up automatic RMD withdrawals. You can schedule them monthly, quarterly, or annually—whatever works for your budgeting style. Just don’t leave it to memory.
Bottom Line
IRAs can be a game-changer for your retirement goals, but only if you play by the rules. The good news? These common mistakes are entirely avoidable with a little planning. By staying within contribution limits, making timely contributions, handling rollovers properly, avoiding early withdrawals, and scheduling your RMDs, you can protect your hard-earned savings and keep your retirement strategy on track.
Retirement planning isn’t just about saving—it’s also about keeping more of what you save. Make sure your IRA works for you, not against you.
