Roth IRA Mistakes: EDU #2601

Jan 7, 2026

Explore common Roth IRA mistakes that could trip you up. Learn why earned income is crucial for contributions and how certain types of income don’t qualify. Discover the implications of MAGI limits and how late bonuses can complicate your contributions. Understand the risks of excess contributions across multiple accounts and the penalties involved. Delve into the two-prong test for tax-free earnings withdrawals, including the five-year rule and various exceptions. Unlock the secrets behind correcting mistakes before the October 15 deadline to avoid unnecessary fees!

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ADVICE

Confirm Earned Income Eligibility

Ensure you have earned income before contributing to a Roth IRA because earned income is required for eligibility.
Do not count dividends, interest, rental income, or IRA distributions as earned income when making contributions.

ADVICE

Watch MAGI Phase-Out Limits

Check your modified adjusted gross income (MAGI) against current year limits before contributing to a Roth IRA.
If you exceed the phase-out, consider conversions but avoid direct contributions.

ADVICE

Use Spousal IRA To Maximize Contributions

Use a spousal IRA if one spouse has earned income and the other does not to maximize household contributions.
Remember the combined contribution cannot exceed the couple's earned income limit for the year.

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If you want to skip over some weather banter you can go to (14:15).

Chris’s Summary
Jim and I review Roth IRA mistakes and walk through key rules on earned income eligibility, income limits, spousal contributions, excess contributions, and qualified distributions. We use an Investopedia article as a framework, clarify how MAGI impacts Roth eligibility, explain the October 15 correction deadline, and break down the two-prong test for tax-free Roth earnings withdrawals, including how the five-year rule is measured across tax years.

Jim’s “Pithy” Summary
Chris and I kick off the first EDU show of 2026 by taking an Investopedia piece called “11 Mistakes to Avoid with Your Roth IRA” and using it as our launchpad. We’re not reading the article to you—we’re breaking down what they got right, what they explained too loosely, and what they left out that changes the meaning. We start with the basics that still trip people up: you need earned income to contribute, and a lot of income that feels “earned” (like dividends, interest, rental income, or IRA distributions) doesn’t count. Then we pivot to the opposite problem: earning too much and accidentally making an ineligible Roth contribution because your MAGI crossed the line, often after a late bonus or surprise taxable payout.

We get into a category of mistakes that can create problems with the IRS: excess contributions. We walk through how easy it is to overfund a Roth when you have multiple accounts, and why the correction rules matter more than most people realize. We talk about the October 15 deadline, how the custodian won’t stop you, and why “removing the excess” isn’t always the same as removing what you deposited. We also get into the weird but real quirk where, if you miss the correction deadline, you may only need to remove the excess contribution itself, not the growth tied to it.

We also dig into the qualified distribution rules for Roth earnings, because this is where the five-year rule gets misunderstood. The Roth has to be five tax years old, and you need a qualifying condition—59½ is one, but it’s not the only one. That’s where the article oversimplifies, and where people make avoidable mistakes when taking earnings out too early.

Show Notes: Article – 11 Mistakes to Avoid With Your Roth IRA

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