The Pros and Cons of a Roth IRA
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In the world of retirement accounts, Roth IRAs are the favored child. What’s not to love about totally tax-free growth on your retirement savings? And if you ask a financial advisor about their disadvantages, the list is likely to be mighty short.
Still, Mr. Roth isn’t always Mr. Right.
How Roth IRAs work
Roth IRAs are individual retirement accounts used to save towards retirement. They tend to be attractive because you can invest after-tax dollars, meaning money you've already paid taxes on, into the account and enjoy tax-free growth and withdrawals. Some people love the idea of not having to worry about taxes when they withdraw their savings in retirement. That said, everything has a downside and Roth IRAs have their fair share.
Roth IRA pros and cons
There are some things you need to know — primarily positive and negative tax implications — if you're considering a Roth IRA. Check out the pros and cons of this investment type below.
Roth IRA Pros
Roth IRA Cons
You enjoy tax-free growth on your investments. Since you paid taxes upfront, you don't have to pay when you withdraw at age 59 1/2.
There is no tax deduction, as you pay taxes before depositing the money into a Roth.
During your lifetime, you're not subject to required minimum distributions, meaning you never have to make withdrawals
There is an income limit. Your modified adjusted gross income must be $144,000 or less for single tax filers in 2022 ($153,000 in 2023) and under $214,000 for those married people filing jointly in 2022 ($228,000 in 2023).
You can withdraw your contributions penalty-free at any time.
While you can withdraw contributions, you can't withdraw earnings before age 59 1/2.
You have diversification in retirement, so all of your accounts aren't tax deferred.
The maximum contribution is relatively low. You'll still need other retirement vehicles to save enough for retirement.
The pros of Roth IRAs
Here is a breakdown of the pros listed in the table above.
Your savings grow tax-free
When you hit retirement age, you won't have to pay taxes on withdrawals. That can give your savings a powerful boost, especially if your tax rate is higher in retirement.
There's no need for required minimum distributions
Traditional IRAs force you to pull out money beginning at age 73, thanks to required minimum distributions. Not so with a Roth. You can choose not to make withdrawals for as long as you're alive. This makes the Roth an effective financial tool to pass on to heirs.
You can withdraw your contributions
Unlike most retirement accounts, it’s easy to withdraw your Roth contributions — not your earnings, mind you — without penalty, at any time. That makes Roths a nice backup emergency fund, as long as you have the discipline not to abuse it.
You get tax diversification in retirement
If you have a 401(k) or traditional IRA, you’ll pay taxes on that money when you start withdrawing it in retirement, and you’ll likely owe taxes on a portion of your Social Security income, too.
Having some money in a Roth provides the benefit of flexibility, meaning you can juggle your distributions from each account so you don’t push yourself into a higher tax bracket. That is, you collect your Social Security benefits, then take some money from your 401(k) or traditional IRA — just enough to bump up against the top edge of your income tax bracket. If you need more income, you take a withdrawal from your Roth, which won’t count as taxable income.
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The cons of Roth IRAs
Now, let’s take a closer look at the cons of this tax-advantaged account.
You pay taxes upfront
Roth IRAs provide tax-free withdrawals for Future You. But if you’re struggling to save, taking a tax deduction now for contributing to a traditional IRA might be just the carrot you need to get your retirement savings on track.
The maximum contribution is low
The Roth IRA contribution limit is $6,500 in 2023 ($7,500 if age 50 and older). Traditional IRAs have the same contribution limits.
That’s not a lot. You'll probably need to invest elsewhere, such as in a 401(k), to have enough for retirement. A 401(k) has an annual contribution limit of $22,500 in 2023 ($30,000 for those age 50 or older).
You have to set it up yourself
The beauty of a 401(k) is your employer encourages you to join — and will auto-enroll you starting in 2025. But you must open your own Roth IRA and remember to fund it each year. Setting up automatic contributions from your bank account can make the process easier.
There are income limits
Only people with income under specific amounts can contribute to a Roth IRA. We detail those income limits here. There’s no income limit on converting your traditional IRA to a Roth, however.
Are Roth IRAs safe?
Every investment carries risk, so it's about deciding whether a Roth IRA aligns with your financial situation and goals. Also note that a Roth IRA is simply a tax-advantaged account you use to invest; the investments are what carry risk. Before choosing your investments, consider doing research or seeking help from a finance professional.
Alternatives to Roth IRAs
If a Roth IRA isn't right for you, not to worry. There are other investment accounts you can use, such as a:
Traditional IRA: This account is also tax-advantaged. You can put pre-tax dollars into your account and enjoy tax-deferred growth on your investments. When it's time to withdraw funds during retirement, you pay income tax on your withdrawals.
401(k): This is retirement account opened by your employer to help you save for retirements. Contributions are also tax-deferred and employers often offer matches, meaning they will match what you contribute up to a certain amount. An added benefit is the contribution limit is higher than a Roth IRA, $22,500 in 2023 and $30,000 if you're 50 or older.
Roth 401(k): Similar to a Roth account, but held within a 401(k) account. The difference is you can contribute a larger amount than you can with a Roth IRA, and there is no income limit.
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