Pros and Cons of a Roth IRA

Are you interested in converting to or opening a Roth IRA? Before you make this decision, you need to compare the pros and cons. Some people find that a Roth IRA is perfect for their financial situation and goals. Others learn that they are better off with another type of investment vehicle. Once you compare the pros and cons you will have a good idea of where you stand.

Pros

  1. Do you worry that tax rates will increase in the future? Well, with a Roth IRA you can get this out of your mind. You will pay at the current rate, and your Roth will grow tax free in the future.

  2. You are not expecting to need all of the money from your Roth IRA during your life. With this, you can leave money to your heirs and they can benefit from the tax free growth. Leaving a Roth IRA behind is one of the best things you can do.

  3. With a Roth IRA you can invest in many different assets including mutual funds, real estate, and CDs among others. In other words, you are not limited in your investments – you still have plenty of control.

  4. Are you worried about the mandatory age requirement for withdrawal that is attached to a traditional IRA? If so, consider a Roth. There is no age requirement, so you have nothing to worry about in this department.

Cons

  1. Roth IRA contributions are not tax deductible. If you are looking for a tax deduction you will want to consider a traditional IRA instead.

  2. You will have to pay conversion taxes. For those opening a Roth IRA for the first time this does not come into play. But if you are converting from a traditional IRA you have to consider this fee. If you are retired and take money from a traditional IRA to pay for the conversion, you have to pay taxes on the money – regardless of your age – if you want to avoid a 10 percent penalty.

  3. IRS phase out rules. The more money you earn the less chance you have of being able to make the full contribution to your Roth IRA. Single filers with modified adjusted gross income of $105k or less can make a full contribution. Joint filers with modified adjusted gross income up to $167k can make a full contribution.

Are you more confused than ever? Since there are so many pros and cons it can be difficult to decide whether or not a Roth IRA is right for you. To make this decision easier, compare a Roth to other investment options. If you still can’t make a decision, don’t hesitate to contact your financial advisor for advice.

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