7 Retirement Account Mistakes That Create Tax Headaches

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Retirement accounts are supposed to be the safe harbor of your financial life—places where your money grows protected from the IRS. However, the tax code surrounding 401(k)s and IRAs is a minefield of “gotcha” clauses. One wrong move—like signing a check the wrong way or missing a deadline by 24 hours—can turn a tax-advantaged account into a taxable disaster.

In 2026, the landscape is even trickier due to the full implementation of SECURE 2.0 Act provisions. High earners face new restrictions on catch-up contributions, and beneficiaries of inherited IRAs are finally facing strict enforcement of withdrawal schedules. These errors don’t just cost you a little fee; they can trigger penalties of up to 25% and unintended tax bills that wipe out years of growth. Here are the seven most expensive mistakes retirement savers are making this year.

1. The “Indirect Rollover” Withholding Trap

When moving money from an old 401(k) to an IRA, you have two choices: a direct transfer (trustee-to-trustee) or an indirect rollover (where they send you the check). Choosing the check is dangerous.

If the check is made out to you, the plan administrator is legally required to withhold 20% for federal taxes. If you want to roll over the full balance to an IRA to avoid taxes, you must deposit the full amount—including the 20% that was withheld—using your own cash within 60 days. If you don’t have the cash to cover that 20% gap, the IRS treats that missing money as an early distribution, hitting you with income tax and a potential 10% penalty. Always insist on a direct rollover where the check is made payable to the new financial institution, not you.

2. The “Pro-Rata” Rule on Backdoor Roths

High earners often use the “Backdoor Roth” strategy: contribute to a non-deductible Traditional IRA, then convert it to a Roth. The mistake happens when you already have other pre-tax IRA money (like a Rollover IRA from an old job).

The IRS Aggregation Rule views all your Traditional IRAs as one big bucket. You cannot just convert the “new” after-tax money. If 90% of your total IRA balance is pre-tax, then 90% of your conversion is taxable. Many investors trigger a surprise tax bill because they forgot about an old IRA sitting in a different brokerage account.

3. Misunderstanding the New Roth Catch-Up Mandate

Starting in 2026, a major provision of the SECURE 2.0 Act kicks in for high earners. If you earned more than $145,000 (indexed for inflation) in FICA wages from your employer in the previous year, you are no longer allowed to make pre-tax catch-up contributions.

Any catch-up contributions (the extra amount allowed for those over 50) must now be made to a Roth 401(k). This means you lose the immediate tax deduction on those contributions. If you or your payroll department mistakenly categorize these as pre-tax, you could face compliance issues or required corrective distributions. You need to verify your 2026 contribution elections immediately if you fall into this income bracket.

4. The Inherited IRA “Year 1-9” Confusion

If you inherited an IRA from a non-spouse after 2019, you likely know about the “10-Year Rule”—the account must be empty by the end of the 10th year. However, a massive confusion involves the years in between.

The IRS has clarified that if the original owner had already started taking Required Minimum Distributions (RMDs), the beneficiary must also take annual RMDs in years 1 through 9, in addition to emptying the account by year 10. For several years, the IRS waived penalties for missing these, but that leniency is fading. Ignoring these annual withdrawals can trigger a 25% excise tax on the amount you failed to withdraw.

5. Ineligible Roth Contributions

The ability to contribute directly to a Roth IRA is income-restricted. For 2026, the phase-out range for singles is projected to be between $153,000 and $168,000, and for married couples between $242,000 and $252,000.

If you get a bonus or a raise that pushes you over this limit after you have already contributed, you have an “excess contribution.” This triggers a 6% penalty tax every year the money stays in the account. You must remove the excess and its earnings before the tax deadline to fix this “good news” problem.

6. Incorrectly Aggregating RMDs

Retirees often assume that RMD rules are uniform across account types. They are not. If you have three different Traditional IRAs, you can calculate the total RMD and withdraw it all from just one account. This is allowed.

However, 401(k)s are different. You generally cannot aggregate RMDs from different 401(k)s. If you still have old 401(k) accounts at three different former employers, you must take a separate RMD from each specific plan. Failing to do so means you missed the RMD for those specific accounts, triggering the penalty.

7. The “Once-Per-Year” Rollover Violation

While you can do unlimited direct (trustee-to-trustee) transfers, you are limited to one indirect rollover per 12-month period. This limit applies to you as a taxpayer, not to each account.

If you cash out an IRA check in January and roll it over, and then try to do the same thing with a different IRA in June, the second rollover is invalid. The IRS treats the second transaction as a taxable distribution and bans you from putting the money back into a tax-advantaged account. The 12-month clock is strict and unforgiving.

Audit Your Accounts

Tax mistakes in retirement accounts are uniquely painful because they often cannot be undone. Once the calendar year closes or the 60-day window expires, the damage is permanent. Take time this month to review your beneficiary status, your income limits, and your rollover history.

Did you get hit with a pro-rata tax bill on a backdoor Roth? Leave a comment below—warn others about the trap!