3 Big Mistakes IRA Savers Make -- and How to Fix Them

It's not a given that you'll have access to a 401(k) for retirement savings purposes. And if you don't, don't sweat it. Funding an IRA over many years could lead to a large amount of savings.

But in the course of contributing to your IRA, you may risk making a few mistakes that are all too common. Here are three to avoid.

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1. Playing it too safe

It's fun to see your IRA balance grow over time. But as that number on screen gets larger, you may realize that in the event of a market crash, you have more to lose.

If a $50,000 IRA loses 20% of its value during a market downturn, that's a $10,000 on-screen loss. If the same thing happens to a $600,000 IRA, that account will lose $120,000.

Of course, any money that's "lost" in a downturn isn't officially lost unless you sell assets in a panic when they're down. But if you can't easily stomach the idea of seeing those losses, you may be inclined to invest your IRA more conservatively.

That's a smart move when you're within a few years of retirement. But early in your career, it could be dangerous.

Leaving too much of your IRA in assets like cash and bonds for decades could limit the returns your portfolio is able to generate. If your IRA doesn't beat inflation during your wealth-building window, it may fall short once retirement comes around.

This doesn't mean you need to keep 100% of your IRA in the stock market. But do understand that if retirement is decades away, you have lots of time to recover from a market decline and still come out ahead.

2. Failing to diversify

Even if you're willing to bear the ups and downs of the stock market, another mistake IRA savers make is concentrating too heavily on the same few companies or sectors. That could put you at risk of outsize losses during an adverse market event.

Let's say you decide to keep 50% of your portfolio in tech stocks or ETFs (exchange-traded funds). If that sector has a meltdown, your portfolio could lose serious value.

To avoid that, aim for a mix of stocks or ETFs across a range of industries. You can also buy shares of an S&P 500 or total stock market ETF for broad exposure without having to do a lot of legwork or track too many investments individually.

3. Overlooking the long-term benefits of a Roth IRA

Many savers choose to put their money into a traditional IRA because they want the up-front tax break. But as valuable as that tax break may be, in the long run, a Roth IRA could be a better choice from a tax perspective.

With a Roth IRA, your money goes in on an after-tax basis. But in exchange, your money gets to grow tax-free, and withdrawals in retirement are tax-free as well. That can be a valuable thing because it can make budgeting easier later in life.

Plus, if you accumulate a large IRA balance, between your savings and Social Security you may end up with an income that puts you in a higher tax bracket than you're in today. Not having to pay taxes on withdrawals could work to your benefit in that case.

Additionally, Roth IRAs don't force savers to take required minimum distributions. That gives you more control over your money.

If you're going to fund an IRA, it's crucial to avoid these mistakes. Don't be afraid to take on some risk when retirement is far off, make sure to diversify, and consider how a Roth IRA might lend to more flexibility. All of these moves could make a big difference by the time you're ready to start tapping your savings.

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