The Case Against Opening a Roth IRA

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By , Staff Writer
Posted on Mon Jun 21, 2010, Last Updated on Mon Jan 3, 2011

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A few weeks back, we wrote about some of the reasons why a Roth IRA could make for an attractive retirement savings product — namely, they’re relatively flexible and offer different tax timing than competing retirement accounts.

But every variety of investment comes with a down side, Roth IRAs included. Here are a few reasons to consider alternative methods of saving:

The Case Against Opening a Roth IRATaxes Later Could be Lower Than Taxes Now

Deciding whether to invest in a vehicle that defers taxes can be a tricky choice. You will have to pay taxes on the money you put into a Roth IRA at the time you put it in, meaning if taxes drop by the time you turn 60, you could end up losing out on some money.

One thing to consider: When you retire, your income probably won’t be as robust, meaning you could qualify for a lower tax bracket. If you put your money in a Roth IRA, you could be stuck paying your initial, higher-bracket taxes. Also, contributions to your Roth IRA will be counted as income, meaning if you are on the brink of a higher bracket, any substantial investment into a Roth IRA could result in a higher income tax burden.

Don’t Delay Your Contributions

If you wait until you’re nearing retirement to contribute to your Roth IRA, you might not be able to take full advantage of its saving power.

A Roth IRA could take 15 to 20 years to make up for the taxes paid when you initially contributed to the account. So if you’re making your first contributions at 59 years old, you could possibly never repay the taxes if you die before two decades pass.

You’ll be Penalized if You Act Too Soon

Nobody plans on using chunks of their retirement savings before they actually retire, but emergencies happen. If something happens and you need to withdraw money early from your Roth IRA, it won’t be painless.

In order for your distribution to come penalty- and tax-free, it must be made after you turn 59 ½ years old. If you decide to take your money out early, you will be required to pay income tax on your interest and an early withdrawal penalty of 10%.

Some exceptions apply. You can take out up to $10,000 from a Roth IRA to buy your first home, and you can distribute the assets if you become disabled.

An Alternative to Roth IRAs

Traditional IRAs are a fairly similar alternative to Roth IRAs. One main difference is that Roth IRAs are only open to those making less than $95,000 per year while Traditional IRAs are open to anyone. Contributions to a Traditional IRA are tax deductible, unlike those going to a Roth IRA.

 

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