Finance Retirement Saving and Investing

Roth IRA Pros and Cons

Roth IRA Pros and Cons

What are the Roth IRA Pros and cons?

Let’s take a step back, what is a Roth IRA? Check this post out for more info on the Roth IRA explained.

This post is about Roth IRA pros and cons.

So, what are the benefits of a Roth IRA?

1. Tax Advantages

As a retirement account, the top Roth IRA pros and cons is the fact that it has several tax advantages. By contributing with post-tax dollars, anything you invest is eligible for tax-free growth and tax-free withdrawals. 

What the heck does that mean?

This means that any money you use to contribute to a Roth IRA is not subject to taxes afterwards! So if you invest early, see significant growth, and start withdrawing from the account when you’re retired, you don’t have to worry about the taxes owed on that money! This is because you’ve already paid for the taxes upfront, before you even contributed to the account.

2. Flexible Contributions

Unlike a 401k and other deductions, you’re able to contribute to a Roth IRA up to the tax day of the following year. For example, for 2022’s Roth IRA, you can contribute from January 1, 2022 until April 18, 2023. So if you haven’t fully contributed to max it out, you have 4 additional months to do so! Awesome, right? This is especially convenient if you’ve already filed your taxes and got a refund. You have the option of putting that refund towards your Roth IRA!

3. No Required Minimum Distributions

Unlike a 401k, there are no required minimum distributions for a Roth IRA. Note: required minimum distributions are when you’re required to withdraw the minimum amount once you reach a certain age. This is typical of tax-deferred retirement accounts. For a 401k, the age in which you have to start taking withdrawals is at 72. (Granted, there are exceptions to this rule.)

4. Freedom to Choose Investment Funds

Since a 401k is tied to your employer, that means there are limitations to the types of investment funds you can invest in with your 401k. However, with a Roth IRA, you have the option to choose not just the brokerage you want to hold your account in, but you also have the flexibility of choosing the types of investment funds you want to invest in. So if there’s an index fund you’re interested in investing in that’s not available for your 401k, you can use your Roth IRA funds to do so!

5. No Age Limits

Yup, you read that right! If you want to open a Roth IRA for your 10 year old, you totally can! Only requirement is that your child will have to have earned income to contribute. This is a great option for kids for several reasons. Roth IRA funds can be pulled out to cover education expenses, so if your child is aiming to go to college, these funds can help cover some of those costs! Not to mention, this is a great time to demonstrate the concept of “it’s not about timing the market, it’s about time in the market”. The more time you’re invested, the higher the return.

What are the cons of a Roth IRA?

1. Contribution Limit

Yes, there are a lot of advantages to having a Roth IRA, but it’s not without its drawbacks. That being said, there is a contribution limit every year. This amount typically increases every few years. For 2022, the contribution limit was $6,000. For 2023, the contribution limit is $6,500. 

2. No Tax Deductions

Since contributions are made with post-tax money, contributions to a Roth IRA are not tax-deductible. This means, you can’t add your contributions to your taxes to decrease the taxable amount you’d be responsible for. 

3. Income Limit

Not only is there a contribution limit, there is also an income limit in which you’re eligible to contribute. If you make more than $153,000, you’re no longer eligible to contribute to a Roth IRA. If you make between $138,000-$153,000, you’re able to contribute a reduced amount. 

4. Early Withdrawal Penalties

Depending on the situation and reasoning in which you’re withdrawing, if you withdraw prior to 59.5 years old, you could be subject to a penalty (in addition to taxes). Again, it depends on your situation as there are exceptions to this rule; however, this is something to keep in mind. Especially if you’re considering retiring early (FIRE). 

5. No Matching

A Roth IRA is completely self-funded and chosen, which means there is no matching as we’ve seen with a 401k. Your employer will not provide any matching contributions as that of an employer-sponsored retirement plan. 

To reiterate, the 5 benefits of a Roth IRA are:

  1. Tax Advantages
  2. Flexible Contributions
  3. No Required Minimum Distributions
  4. Freedom to Choose Investment Funds
  5. No Age Limits 

The 5 cons of a Roth IRA are:

  1. Contribution Limit
  2. No Tax Deductions
  3. Income Limit
  4. Early Withdrawal Penalties
  5. No Matching

There you have it! Interested in learning more? Check this post out for more info on the best index funds for a Roth IRA! 

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