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Regarding retirement accounts, Roth IRAs are the preferred offspring. What’s not to love about growth on your retirement savings that is entirely tax-free? If you ask a financial advisor about their drawbacks, they are probably few.
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The cons of Roth IRAs
Now, let’s examine this tax-advantaged account’s drawbacks in more detail.
Roth IRAs provide tax-free withdrawals for Future You. But if you’re trying to save money right now, you could consider making a traditional IRA contribution that is deductible. However, if you or your spouse, if you are married, have a work-sponsored retirement plan or your income exceeds a specific threshold, your ability to deduct may be restrictedIRS IRA Deduction Limits. View all sources.
2024’s Roth IRA contribution cap is $7,000 (or $8,000 if you’re 50 years of age or older). Traditional IRAs have the same contribution limits.
That’s not a lot. Most likely, in order to have enough money for retirement, you’ll need to invest elsewhere, like in a 401(k). In 2024, the maximum annual contribution to a 401(k) is $23,000 ($30,500 for individuals 50 years of age or above).
The best thing about a 401(k) is that your employer will automatically enroll you starting in 2025 and will encourage you to join. But you have to start your own Roth IRA and make sure you contribute to it every year. The procedure can be simplified by setting up automatic contributions from your bank account.
Contributions to a Roth IRA are limited to individuals whose income falls below certain thresholds. We detail those income limits here. But you can convert your traditional IRA to a Roth with no income restrictions.
The pros of Roth IRAs
The advantages mentioned in the above table are broken down here.
You will not be required to pay taxes on withdrawals once you reach retirement age. That can significantly increase your savings, particularly if your retirement tax rate is higher.
Because traditional IRAs have mandatory minimum distributions, you must start taking money out of the account at age 73. Not so with a Roth. As long as you live, you have the option to choose not to take withdrawals. Because of this, the Roth is a useful financial tool to leave to heirs.
In contrast to most retirement accounts, you can easily withdraw your Roth contributions at any time and without incurring penalties—not your earnings, mind you. As long as you have the self-control to refrain from abusing it, this makes Roths an excellent emergency fund substitute.
When you start taking money out of your traditional or 401(k) account in retirement, you’ll have to pay taxes on it. Additionally, you probably have to pay taxes on a portion of your Social Security income.
The flexibility that comes with having some money in a Roth allows you to adjust your withdrawals from each account to avoid pushing yourself into a higher tax bracket. In other words, after receiving your Social Security benefits, you withdraw a small amount from your traditional or 401(k) account, just enough to bring you up to the maximum amount allowed by your income tax bracket. You can take a withdrawal from your Roth account to increase your income if necessary; this withdrawal is not taxed.
Is a Roth 401(k) Better Than a Roth IRA?
FAQ
Is there risk in Roth IRA?
What happens if you lose money in Roth IRA?
Can I lose my IRA if the market crashes?
What is safer 401k or Roth IRA?
Is a Roth IRA good or bad?
Roth IRAs might seem ideal, but they have disadvantages, including the lack of an immediate tax break and a low maximum contribution. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page.
Are Roth IRA worth it?
Roth IRAs typically yield 7-10% annual returns on average. For example, if you’re under 50 and have just created a Roth IRA, $6,000 in annual contributions for ten years at 7% interest would total $83,095. If you wait another 30 years, the account will be worth over $500,000.
Are Roth IRA risky?
Traditional IRAs have immediate tax savings. Roth IRAs, on which taxes are prepaid, may have a future benefit that is less than the prepaid tax. Specifically, there are three risk factors for Roth IRAs. The first risk is the possibility that the IRS or federal income taxes may not exist in the future.