1. Overlooking Contribution Limits
One of the most common mistakes Americans make with tax-advantaged accounts like 401(k)s, IRAs, and HSAs is not paying close attention to annual contribution limits. Both exceeding and underfunding your accounts can have real financial consequences.
Why Contribution Limits Matter
The IRS sets annual limits on how much you can contribute to different tax-advantaged accounts. These limits are there for a reason—going over them can lead to penalties and extra taxes, while contributing too little means missing out on valuable tax benefits and potential investment growth.
Common Accounts and Their 2024 Contribution Limits
| Account Type | 2024 Limit (Under 50) | 2024 Limit (Age 50+) |
|---|---|---|
| 401(k) | $23,000 | $30,500 |
| Traditional/Roth IRA | $7,000 | $8,000 |
| HSA (Individual) | $4,150 | N/A |
| HSA (Family) | $8,300 | N/A |
What Happens If You Exceed the Limit?
If you put in more than the allowed amount, the IRS may charge a 6% excise tax on the excess contributions each year until you remove them. For example, if you contribute $1,000 too much to your IRA, that’s an extra $60 in taxes annually until it’s fixed.
What If You Don’t Contribute Enough?
If you don’t maximize your yearly contributions, you miss out on both tax savings and the power of compound growth. For many people, especially those planning for retirement or medical expenses, every dollar counts over time.
How to Track Your Contributions Efficiently
- Set up automatic transfers: Many employers and banks let you schedule regular deposits to stay on track.
- Monitor through account portals: Most 401(k), IRA, and HSA providers show your year-to-date contributions online.
- Use budgeting apps: Some financial apps help track contributions across multiple accounts.
- Double-check after job changes: If you switch jobs mid-year, remember that your new employer’s 401(k) adds to your annual total.
Tip: Mark Calendar Reminders Each Year
The IRS often updates contribution limits annually. Set a reminder each January to check for new limits so you can adjust your savings plan accordingly.
2. Misunderstanding Eligibility Rules
One of the most common pitfalls when dealing with tax-advantaged investment accounts in the U.S. is misunderstanding who can contribute to which account, and under what conditions. These mistakes can lead to unexpected taxes, penalties, or missed opportunities for growth. Let’s break down some key eligibility rules and tips to ensure you’re on track.
Roth IRA Income Thresholds
The Roth IRA is a popular retirement account because contributions grow tax-free and withdrawals are tax-free in retirement. However, not everyone can contribute directly to a Roth IRA—there are income limits based on your Modified Adjusted Gross Income (MAGI). If you earn above a certain amount, your ability to contribute phases out or is eliminated entirely.
| Filing Status | 2024 MAGI Range for Reduced Contribution | No Contribution Allowed Above |
|---|---|---|
| Single/Head of Household | $146,000 – $161,000 | $161,000 |
| Married Filing Jointly | $230,000 – $240,000 | $240,000 |
| Married Filing Separately* | $0 – $10,000 | $10,000 |
*If you didn’t live with your spouse at any time during the year, different rules may apply.
How to Avoid Mistakes:
- Always check your latest MAGI before making Roth IRA contributions. Use IRS worksheets or consult a tax professional if unsure.
- If you exceed the limit after contributing, look into recharacterizing your contribution or withdrawing excess funds promptly to avoid penalties.
- Consider a “backdoor Roth IRA” strategy if your income is too high—but make sure you understand the steps and potential tax consequences.
Employer Plan Participation and Account Type Restrictions
Your participation in employer-sponsored plans like a 401(k) can impact your eligibility for other accounts. For example, if you (or your spouse) are covered by a workplace plan, the deductibility of Traditional IRA contributions may be limited based on income.
| You (and Spouse) | Covered by Workplace Plan? | Deductible Traditional IRA Income Limit (2024) |
|---|---|---|
| You only | Yes | $77,000 (single), $123,000 (married filing jointly) |
| Spouse only | Yes | $230,000 (married filing jointly) |
| Neither | No | No income limit for deduction |
How to Verify and Ensure Compliance:
- Review IRS Form W-2 Box 13 (“Retirement plan”) each year to see if you’re considered covered by an employer plan.
- If married, check both spouses’ workplace benefits and coordinate IRA strategies accordingly.
- If you’re unsure about eligibility or deduction limits, use the IRS Interactive Tax Assistant online tool or ask your HR department for clarification.
- Keep good records of all contributions and confirm account types before making deposits—mistakenly contributing to the wrong account type could result in excess contribution penalties.
Quick Checklist for Staying Eligible:
- Confirm MAGI before making Roth or deductible IRA contributions.
- Double-check employer plan coverage status annually.
- Coordinate with your spouse’s retirement plan participation if married.
- If unsure about account rules or limits, seek professional advice or use IRS resources.
3. Neglecting Required Minimum Distributions (RMDs)
If you have a traditional IRA, 401(k), or other tax-deferred retirement account, Required Minimum Distributions (RMDs) are something you can’t afford to overlook. Failing to take your RMD on time is a common and costly mistake that can eat into your hard-earned savings.
When Do RMDs Start?
For most people, RMDs kick in when you turn age 73 (for those turning 72 after January 1, 2023). If you’re still working and have a 401(k) with your current employer, you may be able to delay RMDs from that specific plan, but this exception doesn’t apply to IRAs.
| Account Type | RMD Start Age | Can Delay if Still Working? |
|---|---|---|
| Traditional IRA | 73 | No |
| 401(k) (Current Employer) | 73 | Yes* |
| 401(k) (Former Employer) | 73 | No |
*If you do not own more than 5% of the company and are still working.
The Penalties for Missing RMDs
The IRS takes missed RMDs seriously. If you forget to withdraw the required amount, the penalty is 25% of the amount you should have taken. For example, if your RMD was $10,000 and you didn’t take it, the penalty could be $2,500—on top of the taxes owed on the withdrawal itself. The penalty can drop to 10% if corrected promptly, but that’s still money out of your pocket.
How to Stay on Top of RMDs
- Mark Your Calendar: Set reminders each year so you don’t miss your deadline (typically December 31st).
- Automate Withdrawals: Many financial institutions let you set up automatic RMD withdrawals—this helps eliminate human error.
- Work With a Pro: A financial advisor or CPA can help track your accounts and make sure you withdraw the correct amount.
- Double-Check Multiple Accounts: If you have several IRAs, calculate your total RMD based on all accounts but you can take it from any one (or several) IRA(s). For 401(k)s, each account requires its own separate withdrawal.
Quick Reference: Avoiding RMD Mistakes
| Mistake | Avoidance Tip |
|---|---|
| Missing deadline | Create annual reminders or set up auto-withdrawals |
| Miscalculating amount | Use IRS worksheets or consult with a tax pro |
| Forgetting old accounts | Review all retirement accounts every fall |
| Treating all accounts the same | Know which rules apply to IRAs vs. 401(k)s |
Avoiding RMD mistakes is essential for keeping more of your retirement savings and staying on the IRS’s good side. With some planning and attention to detail, you can sidestep penalties and keep your retirement strategy running smoothly.
4. Mixing Pre-Tax and After-Tax Contributions Incorrectly
Understanding the Difference: Roth vs. Traditional Accounts
One of the most common mistakes Americans make with tax-advantaged investment accounts is mixing up pre-tax (traditional) and after-tax (Roth) contributions. This confusion can lead to unnecessary tax complications, IRS headaches, and even missed savings opportunities. The key difference is simple:
| Account Type | When You Pay Taxes | Main Benefit |
|---|---|---|
| Traditional (Pre-Tax) | You pay taxes when you withdraw in retirement. | Immediate tax deduction on contributions. |
| Roth (After-Tax) | You pay taxes now, no taxes on qualified withdrawals later. | Tax-free growth and retirement withdrawals. |
Where People Get Tripped Up
- Poor Record-Keeping: Not tracking how much you’ve contributed to each type, especially if your employer allows both options in your 401(k).
- Incorrect Allocation: Accidentally making Roth contributions when you meant traditional (or vice versa), leading to unexpected tax bills or lost deductions.
- Mixing Rollovers: Combining pre-tax and after-tax funds during a rollover, which can create complex tax reporting requirements or unintentional taxable events.
Example Scenario
If you contribute $6,000 to a Roth IRA but accidentally report it as a traditional IRA contribution, you might end up paying taxes twice—once now, and again in retirement. Similarly, if you roll over a mix of pre-tax and after-tax dollars from your 401(k) into an IRA without proper documentation, the IRS may assume all funds are pre-tax, leading to double taxation on your after-tax contributions.
Best Practices for Keeping Contributions Separate
- Double-Check With Your Provider: Always confirm with your plan administrator which account you’re contributing to, especially if both options are available at work.
- Keep Detailed Records: Maintain a spreadsheet or use an app to track annual contributions by type (pre-tax vs. after-tax).
- Review Year-End Statements: Carefully review your year-end statements for IRAs and 401(k)s to verify the correct allocation of funds.
- Use Separate Accounts When Possible: Some providers allow separate sub-accounts for Roth and traditional contributions within a 401(k); take advantage of this feature for clarity.
- Consult a Tax Pro Before Rolling Over Funds: If you’re rolling over accounts, talk to a CPA or financial advisor so you don’t accidentally mix pre-tax and after-tax money.
A Quick Reference Table
| Error Type | Pitfall | How to Avoid It |
|---|---|---|
| Mistaken Contribution Type | Pays extra taxes or loses deductions | Verify before submitting each contribution |
| Poor Record-Keeping | Difficult IRS audits, double taxation risk | Track every deposit by account type annually |
| Mixed Rollovers | Complex forms and potential double taxes | Separate rollovers by type; get professional help if unsure |
The Bottom Line for Investors
Avoiding the mix-up between pre-tax and after-tax contributions isn’t just about paperwork—it’s about keeping more of your hard-earned money. By staying organized and aware of where every dollar goes, you’ll minimize surprises at tax time and maximize the long-term benefits of your retirement accounts.
5. Paying Unnecessary Fees or Making Poor Investment Choices
Understanding the Real Cost of Investing
Many Americans open tax-advantaged accounts like 401(k)s or IRAs thinking they’re making smart financial decisions, but costly mistakes can still happen if you don’t pay attention to fees and investment choices. Small fees may not seem like a big deal, but over time, they can eat away at your returns and impact your long-term savings goals.
Common Fee-Related Mistakes
| Mistake | How It Hurts |
|---|---|
| Not comparing account maintenance fees | Pays extra every year just to keep the account open |
| Ignoring fund expense ratios | Higher costs reduce the net return on your investments |
| Paying for unnecessary services | Spends money on features you may not need or use |
Poor Investment Choices to Watch For
- Choosing funds with high risk that don’t match your goals (e.g., investing too aggressively close to retirement)
- Lack of diversification — putting all your eggs in one basket increases risk
- Chasing recent performance instead of sticking to a long-term plan
How to Make Smarter Choices
- Compare account providers for lower annual fees and better service.
- Always check the expense ratio of any mutual fund or ETF before investing; lower is usually better.
- Align your investments with your risk tolerance and time horizon. Use target-date funds if you’re unsure.
- Diversify across different asset classes (stocks, bonds, etc.) rather than betting on one sector.
Quick Reference: Reducing Investment Costs
| What to Check | Target Value/Best Practice |
|---|---|
| Account Maintenance Fee | $0–$25/year preferred; compare options |
| Expense Ratio (Index Funds) | <0.20% |
| Diversification Level | No single asset >20% of portfolio |
By paying attention to both fees and how you allocate your investments, you can keep more of your hard-earned money working for you inside your tax-advantaged accounts.
6. Ignoring Account Beneficiary Designations
One of the most overlooked aspects of managing tax-advantaged investment accounts—like IRAs, 401(k)s, and HSAs—is keeping your beneficiary designations up to date. Many people make the mistake of setting a beneficiary when they first open an account and then never revisiting this information again. This can lead to serious issues down the road, especially if your life circumstances have changed.
Why Are Beneficiary Designations So Important?
Your beneficiary designation determines who will receive your account assets when you pass away. These designations override anything stated in your will or trust. If your designations are outdated or missing, your assets could go to the wrong person—or end up tied up in probate court, causing delays and potential tax headaches for your loved ones.
Common Risks with Outdated or Missing Beneficiaries
| Risk | Potential Consequence |
|---|---|
| Divorce or remarriage not updated | Ex-spouse inherits assets instead of current spouse or children |
| No beneficiary listed | Assets may go through probate, delaying distribution and increasing costs |
| Beneficiary predeceases you | Funds may be distributed according to default rules, not your wishes |
| Incomplete information (e.g., only a first name) | Difficulties identifying the correct recipient; possible legal disputes |
Best Practices: Reviewing and Updating Your Beneficiaries
- Review Annually: Make it a habit to check all your tax-advantaged accounts at least once a year.
- Update After Major Life Events: Changes like marriage, divorce, birth of a child, or death in the family should prompt immediate updates.
- Name Both Primary and Contingent Beneficiaries: A contingent (secondary) beneficiary receives assets if the primary beneficiary cannot.
- Coordinate With Your Estate Plan: Ensure that your account designations match your overall estate planning goals and documents.
- Confirm Details: Double-check names, Social Security numbers, and relationships for accuracy.
Quick Checklist: When to Review Beneficiary Designations
- After getting married or divorced
- If you have a new child or grandchild
- If a beneficiary passes away or their contact info changes
- After updating your will or trust
- If you open a new retirement or investment account
Regularly reviewing and updating your beneficiary designations is one of the simplest ways to ensure your tax-advantaged accounts support your long-term financial and estate planning goals. Don’t let this important detail slip through the cracks!
