The 10 Retirement Account Mistakes That Cost People the Most Money

1. The Pro-Rata Trap

You have a rollover IRA from a previous employer. Your accountant tells you to do a backdoor Roth. You contribute $7,000 to a non-deductible traditional IRA and convert it to a Roth, expecting the conversion to be tax-free since you already paid tax on the contribution.

Except the IRS does not let you choose which dollars get converted. It looks at the total value of all your traditional, SEP, and SIMPLE IRAs and calculates a single taxable percentage that applies to the conversion. If 90% of your combined IRA balance is pre-tax money, then 90% of your conversion is taxable.

The $7,000 "tax-free" backdoor Roth just generated $6,300 in taxable income. The fix is rolling the pre-tax money into an employer 401(k) before converting, but that only works if you know about the rule before you file the paperwork.

2. Missing Your RMD

The IRS does not send you a reminder that your Required Minimum Distribution is due. Your custodian might. Most people assume someone will tell them. When nobody does and December 31 passes without a distribution, the penalty is 25% of the amount you were supposed to take.

On a $500,000 IRA with a required distribution of $18,000, that is $4,500 in penalties for doing nothing. SECURE 2.0 reduced the penalty from 50% to 25%, and if you correct the mistake within two years, it drops further to 10%.

But the penalty exists because you missed a deadline, not because you did something wrong with the money. The IRS considers silence and inaction the same as refusal.

3. The 60-Day Rollover Failure

You take a distribution from a retirement account intending to roll it into another account. The IRS gives you 60 calendar days from the date you receive the money to complete the deposit. Day 60 is a rollover. Day 61 is a taxable distribution.

The clock starts when the check arrives or the funds hit your bank account, not when you requested the distribution or when the check was dated.

If your old employer's plan withheld 20% for federal taxes, you still need to deposit the full pre-withholding amount. The missing 20% comes out of your pocket. If you only deposit what you received, the IRS treats the shortfall as a taxable distribution with a potential 10% early withdrawal penalty on top.

The simplest way to avoid all of this is a direct trustee-to-trustee transfer, which has no 60-day window, no withholding, and no deadline pressure.

4. The IRMAA Blindspot

Medicare Part B and Part D premiums are adjusted based on your income from two years prior. A large Roth conversion, a one-time capital gain, or a lump-sum pension distribution in a single year can push you above an IRMAA threshold and increase your Medicare premiums by thousands of dollars for the following year.

The highest IRMAA tier adds nearly $500 per month to Part B and over $80 per month to Part D, per person. For a married couple, that can exceed $14,000 per year in additional premiums triggered by one year of elevated income.

Most conversion analyses model the income tax cost. Almost none of them model the Medicare cost. The surcharge applies for the entire year based on one year of income. One dollar over the threshold triggers 12 months of higher premiums.

5. Excess Contributions

You contribute to a Roth IRA. Later, your income turns out higher than the limit. The entire contribution is now excess. The penalty is 6% of the excess amount for every year it remains in the account.

If you catch it before the tax filing deadline (including extensions), you can withdraw the contribution plus the Net Income Attributable to it and avoid the penalty entirely. If you miss that deadline, your options narrow to absorbing the excess in a future year (if you are eligible to contribute) or withdrawing it and paying the 6% for every year it sat there.

The NIA formula is not intuitive. It calculates how much the excess earned while it was in the account, and that amount must be removed along with the contribution. Pulling just the contribution amount and leaving the earnings behind creates a new excess.

6. The SIMPLE IRA Two-Year Rule

During the first two years of participation in a SIMPLE IRA, any rollover to a non-SIMPLE account triggers a 25% early distribution penalty instead of the standard 10%.

The two-year clock starts on the date of your first contribution, not the date the account was opened or the date you were hired. Your receiving custodian has no way to verify when your first SIMPLE contribution was made. They accept the rollover. Your statement looks clean. The penalty surfaces when you file your tax return or when the IRS matching system catches the discrepancy.

The 25% rate is punitive by design. Congress wanted to discourage early movement out of SIMPLE plans, and the penalty is the enforcement mechanism.

7. Wrong Distribution Code on the 1099-R

Your custodian reports every distribution on Form 1099-R. Box 7 contains a distribution code that tells the IRS what type of transaction occurred. Code G means direct rollover. Code 1 means early distribution with no known exception.

If your custodian puts Code 1 on a transaction that was actually a direct rollover, the IRS matching system sees an early distribution, not a rollover. You get a CP2000 notice proposing additional tax on income you never received.

The fix is a corrected 1099-R from the custodian, but getting one issued can take weeks, and the notice requires a response within 30 days. The error was not yours. The burden of fixing it is.

8. The Double-RMD Trap

The IRS lets you delay your first Required Minimum Distribution until April 1 of the year after you turn 73. That sounds like a free extra year of tax deferral.

What most people miss is that the second RMD is still due December 31 of that same year. Two taxable distributions in one calendar year. The combined income can push you into a higher bracket and trigger IRMAA surcharges on Medicare premiums two years later.

The April 1 grace period exists to prevent penalties on first-year filers. Using it as a planning strategy without modeling the second-year impact is how people end up with a tax bill they did not expect and Medicare premiums they cannot appeal.

9. Not Filing Form 8606

If you made non-deductible contributions to a traditional IRA and did not file Form 8606, the IRS has no record that any of your IRA money is after-tax. When you take distributions in retirement, they tax the full amount. You pay tax on money you already paid tax on.

The penalty for not filing Form 8606 is $50. The cost of not filing it is double taxation on every non-deductible dollar you contributed, potentially spanning decades of contributions.

Reconstructing lost basis requires old tax returns, custodian records, and Form 5498 history that may no longer be readily available. The form takes five minutes to file. The cost of skipping it can be thousands of dollars in unnecessary tax over a retirement.

10. The Inherited IRA 10-Year Rule

Non-spouse beneficiaries who inherited an IRA after December 31, 2019 must empty the account by December 31 of the 10th year following the year of death.

Many beneficiaries assumed they could wait until year 10 to take everything in a single distribution. For beneficiaries of account owners who had already started taking RMDs, the IRS confirmed that annual distributions are required during years 1 through 9, with the remaining balance distributed in year 10.

Missing an annual distribution during the 10-year window triggers the same 25% penalty as missing an RMD on your own account. The IRS waived penalties for missed annual RMDs in 2021 through 2024 because their own guidance was issued too late for people to comply. That waiver period is over. The penalties now apply.

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