Opening an IRA? The Costly Mistake That Leaves Your Money Earning Nothing

Gen Z is the youngest generation of workers, and they are now positioned to outperform every older age group when it comes to retirement readiness. They started earlier than Baby Boomers, Gen X and even Millennials. A 2025 Vanguard study found 47% of Gen Z workers are on track for a secure retirement, ahead of Millennials (42%), Gen X (41%) and Boomers (40%).¹ Many are still early in their careers and earning less than older generations, yet they have leaned into one advantage that older savers often overlook. But that advantage can disappear fast if you make one of these common IRA mistakes.

A financial advisor can help you take advantage of overlooked savings strategies. Connect with an advisor today!

Why Starting Young Is the Key to Success

The advantage isn’t income; it’s time. Money you set aside early doesn’t just sit there. It earns returns, and those returns earn returns of their own. Over the years, that growth can far exceed what you originally put in. This is why a 25-year-old saving a modest amount can end up ahead of a 40-year-old saving more aggressively. The early start simply gave their money more time to compound.

The math rewards starting now because waiting for a bigger paycheck or a better time usually costs more than what larger contributions could make up for. But saving for retirement early is only half of it. The type of account you use also determines how much of that growth you can pocket.

The Account Choice That Shapes How Much You Keep

When you open an IRA, you are making a decision about when to pay taxes. A traditional IRA may reduce your taxable income today, depending on your situation, but you pay taxes on withdrawals in retirement. A Roth IRA, by comparison, is funded with after-tax dollars, but qualified withdrawals are tax-free.

That choice will affect how much of your savings you actually keep, and it largely comes down to whether you expect to be in a higher tax bracket now or in retirement.

Contribution limits matter here too. For 2026, you can contribute up to $7,500 across your IRAs, or $8,600 if you are 50 or older. ² Roth contributions also phase out at higher incomes. For married couples filing jointly, eligibility begins shrinking once MAGI passes $242,000. ³

The 3 Most Expensive Mistakes

The most common mistake is also the most costly. Many retirement savers fund their accounts but never invest what’s inside them. So money moves in, sits as cash and earns essentially nothing, which defeats the purpose of opening the account in the first place.

Pulling money out early is a second common mistake that triggers taxes and penalties. What can seem like a short-term solution could actually set your retirement savings back by years.

Overshooting the contribution limit creates a third problem. Excess contributions left in the account past your tax deadline are penalized 6% annually until withdrawn, a cost that keeps growing until you catch and correct it. ⁴

So the head start that Gen Z has is real, but not automatic. It only pays off if the account is the right type, the money is invested and the contributions stay inside the account.

A financial advisor can help you avoid costly retirement mistakes. Use SmartAsset’s matching tool to get connected today.

Photo credit: ©iStock.com/PeopleImages, ©iStock.com/shih-wei