Avoid These Common Missteps to Optimize Your Roth IRA

November 16, 2023

By cdarmody on November 16, 2023

A Roth IRA is an effective retirement savings tool, as my colleague Michele Francisco has noted before, that provides investors with flexibility and long-term tax efficiency. You’ll get the greatest benefit out of a Roth IRA by keeping these tips in mind to avoid potential hiccups.

First and foremost, be aware of the Roth IRA early withdrawal penalty, which is 10% of the amount withdrawn, plus potential income tax on top.1 The primary advantage of a Roth IRA is that it allows for investments in the account to appreciate and avoid capital gains tax. Investors should be focused on allowing their Roth IRA to grow as much as possible, for as long as possible, to get the true benefit on their contributions. Early withdrawals, particularly prior to age 59 ½, can drastically impact an investor’s ability to see the maximum benefit of saving within a Roth IRA.

This means that a Roth IRA isn’t a great option for saving for short-term goals, like a car or home purchase, due to the taxes and penalties associated with the 5-year rule. You can’t withdraw earnings tax-free unless it’s been at least five years since you first contributed to the account.2 Short-term savings goals are better aligned with a high-yield savings account or CD’s and money market funds held outside of a retirement account.

You should also make sure to maximize contribution opportunities to a Roth IRA. Earned income is required to make a Roth IRA contribution; however, people often don’t realize that a non-working spouse can also make their annual contribution based on the working spouse’s earnings. Assuming the working spouse makes above the maximum annual contribution amount, both spouses can max out their contributions on an annual basis. This is a great tool for savers looking to get the most out of their retirement account contributions, even if one spouse has left the workforce or is between jobs.

Finally, unless you work with a financial planner or investment advisor, your contributions to a Roth IRA are likely not going to be automatically invested. In general, your contributions will sit in cash or a money market fund until you choose the security you’d like to purchase. If no securities are purchased, your contribution will stay in cash. Most custodians have options that allow you to automatically invest your contributions into a predetermined security, which is recommended if you are not regularly reviewing your Roth IRA account.

The Roth IRA is a powerful financial planning tool but beware of investing simply because of the tax nature of the vehicle. By knowing some of the key “ins and outs” of how Roth IRAs work, you can optimize this retirement savings vehicle to help meet your financial goals. 

If you have questions about your Roth IRA or want to learn more about this option, talk to your RMB advisor today.


The opinions and analyses expressed in this communication are based on RMB Capital Management, LLC’s (“RMB Capital”) research and professional experience are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment or other professional advice. Returns are presented net of fees. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not bear fees, taxes, or transaction costs. The investment strategy and types of securities held by the comparison index may be substantially different from the investment strategy and types of securities held by your account. RMB Asset Management is a division of RMB Capital Management. 

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