Pros and Cons of Roth IRAs

Is a Roth IRA right for you?

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Roth IRAs are personal retirement savings accounts that offer tax benefits. Roth IRAs allow tax-free withdrawals in retirement, including both contributions and earnings, instead of getting immediate tax benefits for contributions as you would with traditional IRAs. 

Roth IRAs offer tax-free income in retirement, but they aren’t always the best choice for everyone. Learn when Roth plans make sense for investing toward retirement, and when they don’t.

Key Takeaways

  • Roth IRAs provide an investment strategy for tax-free retirement income.
  • These IRAs can be used in tandem with other retirement plans.
  • Roths are more flexible than traditional IRAs and other types of retirement plans as far as withdrawing your contributions.
  • Unfortunately, the contribution limits are low and high earners are barred from contributing to these plans.

Pros and Cons of Roth IRAs

Roth IRAs are a popular way to save for retirement because of their tax advantages and flexibility with withdrawals, but there are some downsides to consider as well.

Pros
  • Savings grow tax free

  • You can withdraw contributions anytime

  • Qualified distributions are tax free

  • Flexible investments

  • No required minimum distributions

  • Tax diversification at retirement

Cons
  • Contributions are taxable

  • Low contribution limits

  • Not available for high-income earners

  • Rollovers from traditional plans are taxable

Advantages of Roth IRAs

Tax-free income is an attractive strategy for retirement, and a Roth IRA is one of the few ways you can invest toward tax-free income for retirement.

Savings Grow Tax Free

All earnings in a Roth IRA grow tax free. Traditional IRA earnings grow tax deferred. They're taxed as income when they're distributed in your retirement.

Qualified Distributions Are Tax Free

Any distributions from a Roth account are considered qualified as long as the account has been open for at least five years and you're age 59½ or older. Distributions that aren't qualified may be taxable and subject to a 10% penalty.

You Can Withdraw Contributions Tax Free at Any Time

Roth IRAs are “first in, first out.” This means that contributions are withdrawn before any earnings. You could withdraw up to $36,000 without tax or penalties if you contributed $6,000 to a Roth IRA for six years.

Note

You can tap a portion of your Roth IRA during your working years if you need the money to buy your first home or start a business.  

Flexible Investments

You can use Roth IRAs to invest in a variety of asset types, like stocks, bonds, and even cryptocurrency. But some assets like life insurance and collectibles are not permitted.

Your Roth IRA allocations can easily be changed with your investment strategy to reflect your goals and time horizon. 

No Required Minimum Distributions

Traditional IRAs and employer-sponsored retirement plans like 401(k)s are subject to required minimum distributions (RMDs). You must start taking withdrawals at a certain age. The amount of the RMD and taxable income increases each year. But you're not required to take distributions from a Roth IRA and you can keep as much money as you like in your account as long as you live.

Tax Diversification

You may be eligible to contribute to a Roth IRA even if you're also contributing to an employer-sponsored plan.

Note

A well-diversified portfolio of taxable and non-taxable investments can help you maximize your retirement income.

Disadvantages of Roth IRAs

Tax-free income is attractive to many investors, but a Roth IRA may not always be the ideal choice for a retirement savings account if your employer offers a plan with matching contributions. Here are some potential downsides to a Roth IRA to consider.

Contributions Are Taxable in the Year You Make Them

Roth IRA contributions are made after tax, which affects your cash flow for that year. For example, you have to earn $7,897 to have $6,000 to invest if you're in a 24% marginal tax bracket. Traditional plans are tax deductible. You'd only have to earn $6,000 to invest $6,000.

Low Contribution Limits

IRAs have lower contribution limits than employer-sponsored plans like 401(k)s. The maximum contribution to a Roth IRA is $6,000 for 2022, increasing to $6,500 in 2023, while employer-sponsored plans have a limit of $20,500 in 2022, increasing to $22,500 in 2023.. It may not pay to start a Roth IRA if you haven’t ‘maxed out’ your plan at work yet to take advantage of all matching contributions.

They're Not Available for High-Income Earners

Roth IRA contribution limits are reduced based on your modified adjusted gross income (MAGI). The limits are:

  • Single taxpayers and heads of household: $129,000 to $144,000 in 2022, increasing to $138,000 to $153,000 in 2023
  • Married, filing jointly: $204,000 to $214,000 in 2022, increasing to $218,000 to $228,000 in 2023
  • Married, filing separately (and you lived with your spouse): $0 to $10,000 in 2022 and 2023

You can’t contribute to a Roth IRA if you are married filing jointly and your adjusted gross income is more than $214,000 or if you are single and your income is more than $144,000.

Rollovers From Traditional Plans Are Taxable

The entire amount is taxable if you want to transfer or "roll over" money from a traditional IRA to a Roth IRA. This can potentially mean a significant reduction in your retirement savings. The rollover could also put you in a higher tax bracket for the year, increasing your tax bill.

Should You Use a Roth IRA?

One of the advantages of Roth IRAs is that you can use them with other types of plans. Here are some things to consider as you develop your retirement savings strategy.

Tax Rates Today vs. Tax Rates at Retirement

Roth IRAs can be ideal if you think your income tax rates will be higher when you retire than they are in the years when you contribute.  

Note

You don’t pay tax on your distributions, but you do pay tax on your contributions in the years you make them. A traditional plan might be a better choice if you think you’ll be in a lower tax bracket at retirement than you're in now.

How Much Can You Contribute?

A Roth IRA might not be the best choice if you aren’t contributing the maximum to an employer-sponsored plan that offers matching funds.

A traditional play may be the better choice if you don’t have a plan at work and your budget doesn’t allow for maximum Roth contributions. The additional money invested in a pre-tax plan could compound into a significant difference over time.

Alternatives to Roth IRAs

You have some other options if you decide that a Roth IRA isn't right for you.

Standard Brokerage Accounts

A standard brokerage account offers a broad range of investment choices, including individual stocks and bonds, mutual funds, and ETFs. Capital gains and qualified dividends receive capital gains treatment at lower tax rates. 

Employer-Sponsored Plans

Many employers offer their employees 401(k) plans or other retirement plans as benefits. Some employers make matching contributions to the plans for their employees. Employer-sponsored plans may also offer Roth options.

Traditional IRAs

Traditional IRAs allow for tax-deductible contributions. You can have as many IRAs as you like, as long as the total contributions don’t exceed the Internal Revenue Service (IRS) annual limits. 

Annuities

Annuities are long-term investments that are issued by insurance companies to protect you from outliving your funds by providing a fixed-income stream. They offer tax-deferred growth and guaranteed income. The way annuity withdrawals are taxed depends on whether your contributions were made with pre-tax or after-tax dollars.

Frequently Asked Questions (FAQs)

How do you open a Roth IRA?

Opening a Roth IRA is simple. First, choose a custodian, which is usually a bank, a brokerage firm, or other financial institution. Then you’ll complete a form with basic personal information to open the account. Finally, you’ll contribute money to the account and invest it according to your goals. 

How should you invest the funds in a Roth IRA?

A Roth IRA is part of a retirement plan. Your investments should fit into your overall plan strategy, including your risk tolerance, goals, and time horizon. You can invest your funds in a variety of assets, from stocks to bonds and more. Consider getting professional advice if you don't yet have a plan in place.

What is a backdoor Roth IRA?

Backdoor Roth IRAs are a way for high-income taxpayers to get money into a Roth IRA. You contribute to a traditional IRA with this backdoor strategy, which has no income limits, then convert the funds into a Roth IRA. There are no income limits on these transfers as of 2023.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Publication 590-B (2020), Distributions From Individual Retirement Arrangements (IRAs).”

  2. IRS. “Retirement Plans FAQs Regarding IRAs.”

  3. IRS. "Retirement Topics—IRA Contribution Limits."

  4. IRS. "Retirement Topics—Contributions."

  5. IRS. "Amount of Roth IRA Contributions That You Can Make for 2023."

  6. IRS. "Amount of Roth IRA Contributions That You Can Make for 2022."

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