Pros and Cons of a Roth IRA: Is it Right for You? | MagnifyMoney

What Is a Roth IRA? Pros and Cons

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.
How MagnifyMoney Gets Paid ?
Advertiser Disclosure

A Roth IRA is a type of retirement investment account you might want to add to your portfolio. While traditional IRAs are the most popular IRA option, Roth IRAs come with their own pros, such as tax-free withdrawals, as well as their own cons, like taxed contributions.

So, what is a Roth IRA? Learn about this type of retirement savings option and its pros and cons to decide if it’s the best choice for you.

Find a Financial Advisor

How much would you like to invest?

Find a Financial Advisor

What is a Roth IRA?

A Roth IRA is an individual retirement account (IRA) savings option that allows you to contribute money after taxes.

While you don’t quite see the benefits of this type of account in the current tax year, your contributions grow tax-free since they’ve already been taxed. This is one of the few tax- free investment strategies.  Additionally, you can withdraw your savings in the future tax-free.

Roth IRA pros and cons

Pros Cons
  • Tax-free withdrawals
  • No mandatory withdrawals
  • No maximum age requirements for contributions
  • Ways to get one even if you don’t qualify
  • Limited penalties on early distributions
  • Contributions are taxed
  • Limits based on income
  • Low contribution limits
  • Have to set it up yourself

Roth IRA pros

Here’s where Roth IRAs shine:

  • Tax-free withdrawals: When you decide to take money out of your Roth IRA, you don’t owe taxes on it because your contributions are tax-deductible. This is helpful to your future self: every time you take money out, you get the full value of it. However, traditional IRA owners don’t have the same luxury. For traditional IRAs, you pay taxes on the withdrawals.
  • No mandatory withdrawals: For traditional IRAs, you need to start taking money out by April 1 of the year after you turn 72. With a Roth IRA, on the other hand, there are no mandatory withdrawals. This makes Roth IRAs 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.
  • No maximum age requirements for contributions: For traditional IRAs, you have a deadline to stop making contributions at 70 ½ 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 age 50, you can contribute even more through catch-up contributions. You can also continue to make rollover contributions to either type of account regardless of your age.
  • Ways to get one even if you don’t qualify: 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 IRA 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.
  • 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. However, you are still subject to a 10% tax penalty for early withdrawals on your earnings in the account.

Roth IRA cons

While there are many good qualities of a Roth IRA, there are some downsides to consider:

  • Contributions are taxed: 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 retirement accounts handle taxes differently and could be more beneficial depending on your tax situation. A 401(k) allows you to contribute money pretax, while a traditional IRA allows you to deduct contributions from your taxes.
  • Limits based on income: Traditional IRAs don’t have income limits — you can earn as much as you’d like and still have one — but Roth IRAs do have this barrier. For the 2021 tax year, if you’re single or married filing separately and did not live with your spouse during the year, you’ll need to earn $140,000 or less a year to qualify to make the maximum contributions to a Roth IRA. If you’re married filing jointly, you’ll need to make $208,000 or less a year. Income limitations might even hold you back from opening a Roth IRA, as you can see in the table below. If you earn too much, you might want to think about opening another investment account or trying a Backdoor Roth, which we discussed above.
Roth IRA income and contribution limits for 2021
Filing statusContribution limit based on modified adjusted gross income
Married filing jointly or qualifying widow(er)Full amount: Less than $198,000

Reduced amount: $198,000 or more but less than $208,000

None: $208,000 or more
Married filing separately and you lived with your spouse any time during the yearReduced amount: Less than $10,000

None: $10,000 or more
Single, head of household or married filing separately and you did not live with your spouse any time during the yearFull amount: Less than $125,000

Reduced amount: $125,000 or more but less than $140,000

None: $140,000 or more
  • Contribution limits are low: Both traditional and Roth IRAs have the same maximum contribution limitations — $6,000 for 2021. Keep in mind that the limit also applies to your traditional IRA if you have one, so if you have both a traditional and a Roth IRA, you can only contribute $6,000 in total across both accounts. There are other accounts that allow you to put more money toward retirement. Your employer-sponsored 401(k) plan, for example, allows you to contribute up to $19,500 for 2021 — more than triple the contribution limit of a Roth IRA. If you’re older than 50, you can contribute another $6,500 in catchup contributions to a 401(k) without a hitch. And this doesn’t include employer matching, if your company offers it. This is why it likely makes sense to take full advantage of your 401(k) match, if it’s available, before contributing to an independent investment account like a Roth IRA.
  • Have to set it up yourself: While your employee will likely set up and manage a 401(k) for you, a Roth IRA requires you to be a little more hands-on. If you want to set up a Roth IRA, you are on your own. You will also need to set up your contributions and fund the account yourself, though automatic bank contributions can make this easier.

Is a Roth IRA worth it?

A Roth IRA may not be right for everyone’s savings plan. However, if you are willing to set up an account and manage it on your own, you might benefit from tax-free contributions, as well as tax-free and penalty-free withdrawals. A Roth IRA may also be a good idea if you’re certain your tax bracket in retirement will be higher than it is now.

If you believe your retirement income will be lower than your current income, a traditional IRA might be a better choice than a Roth IRA. Because of the tax implications, a Roth IRA also might not be the right fit for you if your earnings are currently at a peak.

Additionally, you don’t have to necessarily choose just one type of retirement account and stick with only that. You may consider opening a Roth IRA after you’ve already maxed out your 401(k) contributions, for example. Pairing a Roth IRA and a 401(k) can also offer you more tax flexibility in retirement.

Other types of investment accounts to consider

If a Roth IRA doesn’t seem like the right fit for your retirement needs, or if you just want to add other types of retirement savings accounts to your Roth IRA, here are some other types of accounts to consider:

  • Traditional IRA: Traditional IRAs allow you to make pretax contributions and investments then grow tax-deferred. If you earn too much to contribute to a Roth IRA or you’d prefer to defer paying taxes on your contributions, consider a traditional IRA.
  • 401(k): 401(k) plans is an employer-sponsored retirement plan. Contributions are usually made through payroll withholding, so unlike a Roth IRA, you don’t have to manage it yourself. If your employer offers a 401(k), 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): Roth 401(k) plans are also offered by employers and are funded with after-tax contributions, unlike a regular Roth IRA. A Roth 401(k) plan is usually best for people who might be in a higher tax bracket after retiring than they are now. There are no income requirements and you can make high contributions like a traditional 401(k) as long as your employer offers it.

Regardless of the types of retirement accounts 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.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.