TikTok revealed a big mistake you could be making in your Roth IRA


TikTok is hit or miss for accurate advice on financial matters. Although the hashtag “#finance” has garnered over 989 million views, there is just as much bad advice as good. But one user shared a tip that went viral after she revealed a common investment mistake she fell prey to.

“I invested in a Roth IRA for over two years, every single month, and it took me contacting someone in finance to realize I had nothing invested,” she said in the clip. “I just had money on deposit. I never bought a single stock.”

​​​​The clip received approximately two million views and comments flooded in from others who had made the same mistake. So how does this happen? What are the consequences and how can you avoid making the same mistake? Let’s discuss.

To avoid simple but costly mistakes like this, seek out a financial advisor who can help you cover all your bases for retirement and investments.

What is a Roth IRA?

A Roth IRA is an investment vehicle commonly used by young investors for their future retirement savings. With this particular type of individual retirement account, you contribute after-tax dollars to make the initial funding, and since you’ve already paid taxes up front, there are no income taxes when you withdraw in retirement.

So while you don’t get a tax break initially, the money you save on taxes after you retire is where you see the benefit. In other words, you pay taxes on the seeds, not the crop.

There are several other benefits to the Roth IRA:


  • Investment and compound growth

  • Early withdrawal allowed for qualifying life events (buying a home, education, etc.)

  • Withdrawals at 59.5 with no tax penalty

Of course, there are some disadvantages:


  • A general early withdrawal penalty of 10% is charged

  • If you have a Roth IRA for less than 5 years there will be income taxes

  • Roth IRAs have an income limit

A Common Mistake With Roth IRAs

Having a Roth IRA is usually a great sign that an investor is committed to their financial security after retirement. But even good intentions can yield poor results without the right actions. In the case of TikTok, the user opened a Roth IRA and deposited money without choosing any stocks to invest in. It’s called contributing but not investing, essentially using it as a bank account without earning any interest on the deposit.

While experienced investors may agree that this is a rookie mistake, it’s something that happens more often than you might think. This is yet another reason why financial literacy is important and necessary. Even the basic knowledge of opening a retirement account can fall on deaf ears without a deeper understanding of how your money and its compounds grow.

The result – potential years of contributions with no investment gains.



How to Use a Roth IRA Properly

One of the reasons why Roth IRAs are such a popular investment is that they are generally easy to understand, open and fund. Regardless of where you choose to open your IRA the basics of the process are roughly the same:

  1. Choose a financial institution to open a Roth IRA: Finding a place to keep your Roth IRA could be as simple as a Google search. It’s really a personal choice, but you do as a provider with low fees, great customer service, FDIC insurance, and an easy-to-use platform that makes contributing as hands-on as possible. Roth IRAs are a “set-it-and-forget-it” investment tool, but there are options where you can be more practical if you choose. Explore the best Roth IRA.

  2. Open and fund a Roth IRA: Usually, this can only be done online, but some institutions may require a face-to-face visit. This is another reason why you want to choose a provider with an intuitive website and platform. Looking for what you want is an added frustration. From here, you should be able to follow the prompts, link an external account and fund your account via ACH transfers.

  3. Choose your investments: Step three is why we are here. If a Roth IRA is a “savings vehicle,” investing is the gas to fuel it. Without investing, your money does not work for you, but sits idle and is eaten up by inflation and/or fees. Your choice of investment is another personal choice and can include target date funds, index funds, ETFs or individual stocks.

Feeling lost on this step? We highly recommend talking to a professional to get you started. They can help you establish an investment strategy that works for your financial goals.

4. Continue adding: Check if your institution requires minimum monthly contributions. Regardless, your investment will go much further if you continue to make regular contributions over time. As mentioned above, there is a contribution limit of $6,000 per year for those under 50 and $7,000 for anyone 50 or older.

Base line

A Roth IRA can be a great accessory to add to your retirement savings toolkit. Other popular investment drivers include tax-deferred accounts such as 401(k)s and traditional IRAs. Whichever option you choose, just take the time to double check that you are really investing and putting your contributions to work. Don’t make the same mistake as a user who went viral on TikTok.

Tips for your Retirement Savings

  • Financial advisors specialize in helping clients invest for retirement, making them great partners for anyone looking to grow their retirement savings. Fortunately, finding a local financial advisor doesn’t have to be difficult. SmartAsset’s free tool can match you with up to three advisers in your area. Get started now.

  • Roth IRAs earn more if you start young and add to them consistently over the years. But if you already have a retirement account, you can convert your money to a Roth IRA.

  • If you are managing your own investments, it is important to have a concise plan for where your assets will go. Try using the SmartAsset asset allocation calculator to find a plan that suits your risk profile.

Photo credit: ©iStock.com/jygallery, Photo credit: ©iStock.com/Andrii Dodonov

The post TikTok Reveals a Big Mistake You May Be Making in Your Roth IRA appeared first on SmartAsset Blog.

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