A method includes performing an ion beam etching process on a tunnel magnetoresistance (TMR) stack to remove material portions of a first magnetic layer and a tunnel barrier layer of the TMR stack. The ion beam etching process stops at a top surface of a second magnetic layer of the TMR stack. A protective layer is deposited over the TMR stack. Another etch process is performed to remove the protective layer such that a portion of the second magnetic layer is exposed from the protective layer and a spacer is formed from a remaining portion of the protective layer. The spacer surrounds sidewalls of the first magnetic layer and the tunnel barrier layer. The portion of the second magnetic layer exposed from the protective layer is removed so that a TMR sensor element remains, where the TMR sensor element includes a bottom magnet, a top magnet, and a tunnel junction.