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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.
Let’s start with the Roth’s disadvantages.
provide tax-free withdrawals for Future You. But if you’re struggling to save, taking a tax deduction now for contributing to a might be just the carrot you need to get your retirement savings on track.
The Roth IRA contribution limit is $6,000 in 2021 ($7,000 if age 50 or 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 $19,500 for 2021 ($26,000 for those age 50 or older).
The beauty of a 401(k) is your employer encourages you to join — possibly even auto-enrolls you. 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. (Here are our picks for .)
Only people with income under specific amounts can contribute to a Roth IRA. We detail those .
“That’s certainly a con,” says John H. Konetzny, a certified financial planner and enrolled agent at Practical Planner LLC in Groton, Massachusetts. Still, he’s a big fan of Roths.
There’s no income limit on , however.
Despite the items above, the Roth is still a powerful way to save for retirement:
“Once you pay for the privilege by paying the tax upfront, all the earnings build income-tax-free,” says Ed Slott, a certified public accountant and founder of IRAHelp.com in Rockville Centre, New York.
When you hit , 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.
Traditional IRAs force you to pull out money beginning at age 72. Not so with a Roth.
Unlike most retirement accounts, it’s easy to — 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 yours.
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, 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.