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.
The cons of Roth IRAs
Let’s start with the Roth’s disadvantages.
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
You can contribute up to $6,000 to a Roth IRA in 2020. If you’re 50 or older, you’re allowed an additional $1,000 catch-up contribution each year. 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 in 2020, up from $19,000 in 2019. Plus, savers 50 and older can make catch-up contributions of up to $6,500 each year (that’s up from $6,000 in 2019).
You have to set it up yourself
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 best Roth IRA accounts.)
There are income limits
Only people with income under specific amounts can contribute to a Roth IRA. We detail those income limits here.
“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 converting your traditional IRA to a Roth, however.
The pros of Roth IRAs
Despite the items above, the Roth is still a powerful way to save for retirement:
Your savings grow tax-free
“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 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 72. Not so with a Roth.
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 yours.
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, 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.
Here are some of our top picks for Roth IRA accounts: