Top IRA Mistakes Americans Make During Tax Filing

Top IRA Mistakes Americans Make During Tax Filing

The Individual Retirement Account (IRA) is one of the most important tools for retirement planning in the United States, offering significant tax benefits.

Tax season is a period when many taxpayers make mistakes that can result in penalties, additional fees, and tax issues. Here are the main IRA-related errors and how to avoid them.

1. Contributing Above the Annual Limit

One of the most common mistakes is over-contributing.

Each type of IRA has annual limits set by the IRS. In 2026, for example, the limit for combined contributions to Traditional and Roth IRAs is $6,500 for individuals under 50, and $7,500 for those 50 or older, including the “catch-up contribution.”

Exceeding this limit can result in a 6% annual penalty on the excess amount while it remains in the account.

Correction requires removing the excess before the final filing deadline, including any earnings on that excess, to avoid the annual penalty.

2. Ignoring Roth IRA Income Limits

Not all taxpayers are eligible to make direct contributions to a Roth IRA. Eligibility is determined by Modified Adjusted Gross Income (MAGI).

For 2026, the phase-out begins at $146,000 for single filers and $230,000 for joint filers. Contributing above these limits creates an excess contribution subject to a 6% annual penalty.

3. Incorrect Application of the Pro-Rata Rule

The pro-rata rule is often overlooked by investors using the backdoor Roth IRA strategy. When converting amounts from a Traditional IRA to a Roth IRA, the IRS treats all Traditional IRAs combined.

This means that if an investor has mixed pre-tax and after-tax contributions, the conversion is taxed proportionally. Ignoring this rule can lead to substantial tax surprises.

4. Failing to Report Non-Deductible Contributions

When a taxpayer makes non-deductible contributions to a Traditional IRA, it is mandatory to file Form 8606. This form establishes the account’s after-tax basis.

Failing to file can result in:

• Paying taxes twice on the same amount.
• The IRS failing to recognize the accumulated basis correctly.

5. Failing to Meet the Required Minimum Distribution (RMD)

Traditional IRA holders aged 73 or older must take the RMD annually. Failure to do so results in severe penalties, historically up to 50% of the undistributed amount, although some reforms have reduced the penalty in certain cases.

RMD calculations are based on the account balance as of December 31 of the previous year and the life expectancy table provided by the IRS.

Many investors mistakenly believe they can defer indefinitely, which can result in significant penalties.

6. Improperly Deducting Traditional IRA Contributions

Not all Traditional IRA contributions are deductible. Deductibility depends on two factors:

• Participation in an employer-sponsored retirement plan (such as a 401(k)).
• Income level (MAGI).

Improperly claiming a deduction can lead to tax adjustments and additional interest charges.

7. Confusing Conversion with Contribution

Converting a Traditional IRA to a Roth IRA is not a contribution. Unlike annual contributions, conversions are not subject to contribution limits but are fully taxable on pre-tax amounts.

Some investors mistakenly believe large conversions will immediately reduce future tax liability without affecting the current year. This can result in a higher marginal tax bracket and unexpected taxes.

8. Missing the Contribution Deadline

IRA contributions can be made up to the filing date of the following year, usually April 15. Common mistakes include:

• Contributing after the deadline and assuming it counts for the prior tax year.
• Failing to specify the correct contribution year with the broker or bank.

9. Underestimating State Tax Implications

Although IRAs are federally regulated, many states have their own rules regarding taxation. States like California, New York, and New Jersey have specific regulations regarding IRA deductions and capital gains.

Ignoring state rules can create significant discrepancies between federal planning and actual tax liability.

10. Lack of Planning and Annual Review

Many taxpayers treat IRAs as passive accounts, forgetting to review contributions, limits, and conversion strategies annually. Periodic reviews allow investors to:

• Adjust contributions based on income or family changes.
• Plan Roth conversions efficiently.
• Ensure compliance with IRS limits and requirements.

Maintaining detailed records of contributions, conversions, and RMDs helps prevent cumulative errors over decades, especially in accounts with multiple tax strategies.

Written by

Gabriel Gonçalves