TikTok Exposed a Major Mistake You May be Making in Your Roth IRA

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

“I invested in a Roth IRA for over two years, every single month, and it took me dating someone in finance to realize that I had never invested anything,” she said in the clip. “I had just deposited money. I never bought a single stock.”

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

To avoid simple, yet costly mistakes such as this, seek out a financial advisor that can help you cover all of your bases regarding your retirement and investments.

What is a Roth IRA?

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

So even though you don’t receive a tax break initially, the money you save on taxes after you retire is where you see the benefit. Put another way, you pay taxes on the seeds, not the crop.

There are some other benefits to the Roth IRA:

Pros:

Compounded investing and growth
Allowed early withdrawal for qualifying life events (buying a home, education, etc.)
Withdrawals at 59.5 with no tax penalty

Of course, there are some drawbacks:

Cons:

General early withdrawal results in a 10% penalty
Holding a Roth IRA for less than 5 years results in income taxes
Roth IRAs have an income cap

A Common Mistake With Roth IRAs

Possessing a Roth IRA is generally a great sign that an investor is committed to his financial security after he retires. But even good intentions can yield poor results without the proper actions. In the TikTok case, the user opened a Roth IRA and put money in without selecting any stocks to invest in. This is known as making a contribution but failing to invest, basically using it as a bank account with no interest earning on the deposit.

While seasoned investors may agree that this is a rookie mistake, it’s one that does happen more often than you would assume. This is yet another reason why financial literacy is important and necessary. Even implementing the basic knowledge of opening a retirement account can fall on deaf ears if a deeper understanding of how your money grows and compounds is not known.

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

How to Use A Roth IRA Properly

One of the reasons Roth IRAs remain a popular form of investing is that they are generally easy to understand, open and fund. No matter where you choose to open your IRA the basics of the process are about the same:

Choose a financial institution to open a Roth IRA: Finding a place to house your Roth IRA can be as simple as a Google search. It is truly a personal preference, but you do what a provider with low fees, great customer service, FDIC insurance, and an easy-to-use platform that makes contributing as hands-off as possible. Roth IRAs are commonly a “set-it-and-forget-it” investment tool, but there are options where you can be more hands-on if you choose. Explore the best Roth IRAs.
Open and fund your Roth IRA: Typically, this can be done solely online, but some institutions may require a face-to-face visit. This is another reason why you want to select a provider with an intuitive website and platform. Having to hunt for what you need is an added frustration to avoid. From here, you should be able to follow the prompts, attach an external account and fund your account through ACH transfers.
Choose your investments: Step three is why we’re here. If a Roth IRA is a “savings vehicle” then investing is the gas to fuel it. Without investing, your money isn’t working for you, just sitting idle and being eaten by inflation and/or fees. Your investment selection is another personal preference and can include target-date funds, index funds, ETFs or individual stocks.

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

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

Bottom Line

A Roth IRA can be a great accessory to supplement your retirement savings toolkit. Other popular investing drivers include tax-deferred accounts like 401(k)s and traditional IRAs. Whichever you choose, just take the time to double-check that you’re actually investing and putting your contributions to work. Don’t make the same mistake the made a user go viral on TikTok.

Tips for Your Retirement Savings

Financial advisors specialize in helping clients invest for retirement, which makes them great partners for anyone looking to boost their retirement savings. Luckily, finding a local financial advisor doesn’t have to be hard. SmartAsset’s free tool can match you with up to three advisors in your area. Get started now.
Roth IRAs earn the most if you start young and add to them consistently for decades. But if you already have a retirement account, you can convert your money to a Roth IRA.
If you’re managing your own investments, it’s important to have a succinct plan in place for where your assets will go. Try using SmartAsset’s asset allocation calculator to figure out a plan that fits your risk profile.