Pros and Cons of a Roth IRA

Written by , December 2, 2014

Pros and Cons of a Roth IRAWhen saving for retirement there are many choices to make. One of those choices is to decide between a Roth IRA and a Traditional IRA. Both have their distinct advantages and disadvantages. A Roth IRA offers lots of significant benefits, including flexibility on distributions and withdrawals.

Unfortunately, some people choose one of the other based on misinformation. Before deciding if a Roth IRA is better, or a Traditional IRA is the way to go, it’s important to know how to compare the two. Then you can begin to ask yourself the questions that matter and impact your present financial situation, as well as your financial future. It is a good idea to consider the pros and cons of Roth IRA before you decide.

The Pros of a Roth IRA

  • They are good for procrastinators. The Roth IRA account allows you to contribute to your Roth IRA until the tax date of the following year. There are also many payment channels for making these contributions.
  • They are free from tax penalties. If you have a Roth IRA account, you can withdraw contributions at any time you want to without taxes or penalties. However, with a few exceptions you must hold the account for at least 5 years and be at least 59½ before you can enjoy penalty free withdrawals of earnings.
  • Saving during retirement. Traditional IRAs don’t allow contributions after you reach 70½. A Roth allows you to continue to make contributions as long as you stay within the income limits. You’re also never forced to make withdrawals (the so-called “required minimum distributions”), unlike a traditional IRA.
  • The Cons of a Roth IRA

  • They have income limitations. Not everyone is eligible for a Roth IRA. For example, if you make more than $114,000, and you’re single, then you don’t qualify. The income limitation for couples who file a joint tax return is $191,000.
  • The possibility of missing out of immediate tax benefits. As compared to a traditional IRA, Roth IRA accounts aren’t eligible for tax deductions on contributions.
  • Tax liability for conversion. If you choose to convert your traditional IRA into a Roth account, you’ll be hit with a tax bill on the total amount of conversion. This can be a significant burden for many taxpayers, some of whom are forced to take an early withdrawal of account funds (and pay an additional penalty) into order to cover that tax liability.
  • In order to make a good choice with regards to a Roth IRA, it is vital to consider the pros and cons. Many people prefer the Roth IRA, but it’s clearly not for everyone. Your retirement goals, current income bracket, and future income can make a difference in how you save for retirement.

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