TikTok’s Humphrey Yang Says These 5 Roth IRA Mistakes Are Costing You Money

Humphrey Yang

When you plan for retirement, it’s worth considering various retirement account options. Getting a Roth IRA would allow you to stash away up to $7,000 or $8,000 (if 50+) this year and enjoy tax-free investment earnings. However, misunderstanding the rules or picking the wrong investments could cost you money.

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Financial TikToker Humphrey Yang cautioned against these five Roth IRA mistakes in one of his YouTube videos.

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Not Having a Roth IRA

If you’re putting cash in your employer’s retirement account, you might not consider contributing to a Roth IRA as well. But this can cause you to miss out on this account’s flexibility for choosing from more investment types and enjoying tax-free earnings.

Yang suggested first saving enough in your work’s plan to get your employer’s full match and then using the IRA for extra contributions. Once you exceed the annual IRA contribution limit, you might use a taxable investment account.

Not Understanding Roth IRA Rules

Yang explained that Roth IRAs require earned income, which could include taxed employee pay and self-employment income. It excludes sources like interest, capital gains and government benefits. You also can’t exceed the tax year’s modified adjusted gross income limit (MAGI) for your filing status, and phase-out limits for partial contributions apply.

The IRS notes that you can make a full contribution with an MAGI below $146,000 or a partial one with an MAGI of $138,000 to $153,000 in 2024. Joint filers need an MAGI below $230,000 for the full contribution or $230,000 to $240,000 for a partial amount.

Making Early Withdrawals

An advantage of a Roth IRA is you can withdraw your contributions whenever you want and not worry about penalties. But it’s a different story for earnings withdrawals, which often require waiting until you’re 59 ½ or older to avoid a 10% tax penalty. Additionally, you’ll pay taxes on those earnings unless you’ve been contributing to that account for five years or more.

Yang advised, “If you do anticipate needing the money before retirement, I would actually say you shouldn’t be investing in a Roth IRA because by withdrawing early, you’re actually destroying all the benefits that you get from a Roth IRA.”

Picking Speculative Investments

While some investors pick risky IRA investments like penny stocks, Yang discussed how focusing on short-term market wins can be a mistake that puts your retirement savings at risk. His advice was to focus on less risky, diversified investments for the long term. By regularly contributing to your Roth IRA, compounding returns will help grow your money.

Putting Too Much Cash in a Roth IRA

Exceeding the yearly IRA contribution limit is a costly mistake you might make, especially if you’re managing multiple accounts. Since the IRS would start charging a 6% annual excess contribution tax, acting quickly is crucial.

“So if you find yourself in a situation where you actually contribute too much, what you want to do before you file your tax return is basically take out any of the excess contributions and earnings on your excess contribution of that Roth IRA,” Yang instructed.

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