What downsides to a Roth make it the wrong choice for you?

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VIDEO TEXT:

0:00 Intro
You’re finally getting paid at that hard-to-get job that didn’t pay for 7 months.

Perhaps now you’re planning your escape…I mean, retirement.

We covered the benefits of a Roth retirement account earlier. It sounds ideal for retirement savings, right? What about the bad?

0:13 Tip 1: Can you put back money that you take out of a Roth IRA?
First, let’s talk contributions. You can take them out at any time in a Roth without penalty nor taxes as explained in prior videos. But you can’t put them back in like you can with other types of retirement accounts.

Plus, you’re limited each year by the Roth’s contribution limit, making it harder to make up for the withdrawal.

0:29 What happens when you withdraw your contributions and profits?
Next, let’s talk about the sweet profits that your contributions might make while invested in your account. What if you want to withdraw them?

The ideal scenario is to be over 59 ½ and to have had your account open for 5 years. You would then avoid the 10% penalty and avoid paying taxes on those profits.

If you’re under 59 1/2, or haven’t had your Roth for 5 years, there are exceptions to avoid the penalty and taxes. Check irs.gov for the latest.

0:54 Ending
IRA taxes can be tricky. Subscribe to learn more.

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A Roth IRA is a popular investment tool that allows individuals to save for retirement in a tax-efficient way. While a Roth IRA has many benefits, such as tax-free withdrawals in retirement and no required minimum distributions, there are also some downsides that investors should be aware of.

One of the downsides of a Roth IRA is that contributions are made with after-tax dollars. This means that you won’t receive any immediate tax benefits for contributing to a Roth IRA, unlike a traditional IRA that offers a tax deduction for contributions. This can make it harder to save for retirement as you won’t be able to lower your current taxable income by contributing to a Roth IRA.

Another downside of a Roth IRA is that there are income limitations on who can contribute. In 2021, individuals with a modified adjusted gross income (MAGI) of over $140,000 ($208,000 for couples filing jointly) are not eligible to contribute to a Roth IRA. This can be frustrating for high-income earners who are looking for ways to save for retirement in a tax-efficient way.

Additionally, Roth IRA contributions are limited to $6,000 per year for individuals under 50 and $7,000 for those over 50. This is a relatively low contribution limit compared to other retirement accounts, such as 401(k)s or traditional IRAs, which have higher limits.

Finally, some investors may be turned off by the Roth IRA’s lack of flexibility when it comes to withdrawals. Unlike a traditional IRA, you can’t take withdrawals from a Roth IRA penalty-free until five years after your first contribution, regardless of your age. This can be inconvenient if you need to access your retirement savings before age 59 1/2.

In conclusion, a Roth IRA can be a great investment tool for many investors, but it’s important to be aware of its downsides. From after-tax contributions to income limitations and low contribution limits, there are some factors that may make it more difficult to save for retirement with a Roth IRA. However, for those who qualify and are able to take advantage of its benefits, a Roth IRA can be a powerful way to save for retirement in a tax-efficient way.