Ramsey and AARP Warn of IRA and Roth IRA Pitfalls

Personal finance commentator Dave Ramsey and the advocacy group AARP recently warned Americans about risks tied to traditional IRAs and Roth IRAs, urging savers to review tax, legal and fee consequences before moving or withdrawing funds.

Ramsey pointed to tax traps and penalties. Withdrawals from a traditional IRA are taxed as ordinary income, and taking money before age 59½ generally triggers a 10 percent early-withdrawal penalty unless an exception applies. Converting a traditional IRA to a Roth IRA creates taxable income in the year of conversion, which can raise your tax bill and push you into a higher tax bracket. A larger reported income figure can also increase Medicare Part B and D premiums through Income-Related Monthly Adjustment Amounts (IRMAA) and affect how Social Security benefits are taxed.

AARP noted that Roth IRAs normally allow tax-free qualified withdrawals and do not require required minimum distributions for the original owner. Direct Roth contributions, however, are limited by income, and conversions from traditional IRAs still generate taxable income in the conversion year.

The group also warned that scams and high-pressure sales often target people moving retirement money. Fraudsters and aggressive promoters can appear when account holders request rollovers, distributions or transfers to new custodians. Offers advertised as ‘free rollovers' or ‘better investment opportunities' can expose savers to unsuitable products, steep fees or outright fraud, AARP cautioned.

Both advisers highlighted differences in creditor and bankruptcy protections. Employer-sponsored retirement plans such as 401(k)s are generally protected under federal law from many creditor claims and in bankruptcy. IRA protections can be different and may depend on federal law and on state rules, a distinction that matters when rolling employer-plan balances into an IRA after leaving a job.

Ramsey and AARP also called attention to investment costs and product suitability. High-fee funds, illiquid annuities and complex securities aimed at older investors can reduce retirement savings. AARP recommended verifying professional credentials and being cautious about unsolicited contacts regarding retirement accounts.

Both recommended that savers calculate the full tax cost of conversions and withdrawals, review the legal protections that apply to their accounts, check fee structures and consult trusted tax or legal advisers before converting, rolling over or withdrawing IRA funds.