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Pros and Cons of a Roth IRA

Pros and Cons of a Roth IRA
07 Feb
Maybe you were always told that a Traditional IRA is the best investment account you should have. But then you discovered that there are so many more options out there than the default. Yes, Traditional IRAs are the most popular, but that doesn’t mean they’re the best choice for you.
Other retirement investment accounts exist, like Roth IRAs. But these accounts aren’t made for everyone. Weigh the pros and cons to see if you should open a Roth IRA.

Roth IRA: Pros

Roth IRAs and Traditional IRAs are similar in that they’re both retirement accounts, but they aren’t the same. Here’s where Roth IRAs shine.

1. Tax-free withdrawals

When you decide to take money out of your Roth IRA, you don’t owe taxes on it because you’ve already paid taxes on the money you’ve contributed. For Traditional IRAs, you pay taxes on the withdrawals. This is helpful to your future self: every time you take money out, you get the full value of it. Traditional IRA owners don’t have that same luxury.

2. No mandatory withdrawals

For Traditional IRAs, you need to start taking money out as soon as you hit 70 and a half years of age. But what if you don’t want to take out money yet? Well, Roth IRAs allow that. There are no mandatory withdrawals for Roth IRAs.

This is a great option if you don’t need to start making withdrawals once you hit a certain age. For example, if you’re still working and earning an income, your money can continue to grow in your Roth IRA account.

3. No maximum age requirements for contributions

For Traditional IRAs, you have a deadline to stop making contributions at 70 and a half years of age. There’s no age limitation for Roth IRAs. You can make maximum contributions as long as you’d like without worry. And when you hit 50 years of age, you can contribute even more through catch-up contributions.

4. You can get a Roth IRA even if you don’t qualify for one

While there are income limitations for Roth IRAs, you can still find a way to get one if you’d like one. A backdoor Roth is when you open a Traditional IRA and later roll it over to a Roth IRA. For high-income earners, this is a great way to tap into Roth IRA benefits even if you can’t initially qualify for one.

5. Limited penalties on early distributions

Because you’ve already paid taxes on your Roth IRA contributions, you can withdraw that money without incurring taxes or penalties at any time. You are still subject to a 10% tax penalty for early withdrawals on your earnings in the account. But if you need the money for an emergency and don’t have any extra savings prepared, you might need to tap into your Roth IRA account.

Roth IRA: Cons

While there are many good qualities of a Roth IRA, here are some ways you might be turned off by them.

1. Tax-deductible contributions

While your withdrawals aren’t taxed, your contributions are. That means every time you contribute to your Roth IRA, you are contributing money that you’ve already paid taxes on. Other retirements accounts handle taxes differently and could be more beneficial to you depending on your tax situation. A 401(k) allows you to contribute money pre-tax and a Traditional IRA allows you to deduct contributions from your taxes.

2. Income limits

Traditional IRAs don’t have income limits — you can earn as much as you’d like and still have one — but Roth IRAs have this barrier.

If you’re single or filing separately, you’ll need to earn $122,000 or less a year to qualify to make the maximum contributions to a Roth IRA. If you’re filing jointly, you’ll need to make $193,000 or less a year.

Income limitations might hold you back from opening a Roth IRA. If you earn too much, you might want to think about opening another investment account or trying a backdoor Roth.

3. Low contribution limits

While both Traditional and Roth IRAs have the same maximum contribution limitations — $6,000 for 2019 — there are other accounts you can have where you can put more money towards retirement. Keep in mind that the limit applies to your Traditional IRA too if you have one. So if you have both, you can only contribute $6,000 in total across both accounts.

Your employer-sponsored 401(k) plan allows you to contribute up to $19,000 for 2019. This is more than triple what you can give compared to a Roth IRA. If you’re older than 50, you can contribute an another $6,000 without a hitch. And this doesn’t include employer matching, if your company offers it.

If you have a 401(k) plan through work that offers a matching employer contribution, take advantage of the match before contributing to independent investment accounts, like a Roth IRA.

Is a Roth IRA right for you?

While a Roth IRA has some serious benefits, the downsides might be enough for you to look elsewhere. Here are some retirement account alternatives.

  • Traditional IRA — If you earn too much to contribute to a Roth or you’d prefer to defer paying taxes on your investment, consider a Traditional IRA.
  • 401(k) — If your employer offers one, take advantage of it. The high contribution limit is great if you can afford to max it out. If you’re self-employed, you can try opening a Solo 401(k) or a SEP IRA.
  • Roth 401(k) — No income requirements and you can make high contributions like a traditional 401(k) as long as your employer offers it.

Regardless of which one you choose, make sure you settle on the right plan for your financial situation. Your means and retirement goals will determine which one is right for you.

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Dori Zinn
Dori Zinn |

Dori Zinn is a writer at MagnifyMoney. You can email Dori here


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