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3 Reasons a Roth IRA Might Be Wrong for You

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Many financial advisers believe that Roth individual retirement accounts are the best way available for you to save for retirement. With income tax rates having gone up in 2013 and with further increases potentially on the horizon, a retirement account that promises tax-free treatment not only while your money is invested within the account but also when you decide to make distributions is extremely valuable.

Yet choosing a Roth IRA over other retirement-saving choices comes at a cost -- and for many taxpayers, it's too high a price to pay.

Your Tax Rate Isn't Going to Get Any Higher

The general idea behind a Roth IRA is that by making after-tax contributions, you get the benefit of tax-free growth throughout your career and tax-free withdrawals in retirement.
But the tradeoff is that you give up the potential deduction you might be eligible to receive by making contributions to a traditional IRA or 401(k) account.

Whether that tradeoff is worth it depends on several factors, but the most important compares your current tax rate with what you expect to pay after you retire.

If you're in the prime of your career and have earnings that put you in the maximum tax bracket, the value of getting a tax deduction on traditional retirement-account contributions is extremely high. So using a Roth and giving up that deduction doesn't make much sense. For those who are just getting started and are in low tax brackets, it's a lot easier to justify giving up a smaller deduction now in exchange for big tax savings later.

Your Employer Gives You a Better Deal

Roth IRAs don't offer one thing that many workers get from their 401(k) plans: matching contributions from their employers.

If you only have a limited amount to save for retirement, your first priority should generally be to contribute to your workplace 401(k) at least to maximize your employer match. After you've claimed all the free money your employer is willing to give, then it can be smart to look at a Roth as a secondary option. But with many employers offering matching contributions when you contribute as much as 6 percent or more of your salary, doing both 401(k) and a Roth might be more than you can afford.

You're Scared of Washington

What the tax laws give, tax law changes can take away. For instance, the latest administration budget proposal would set maximums on the amount of tax-favored retirement savings that you can set aside, as well as other provisions that would impose required minimum distributions on Roth IRAs for the first time. Some analysts worry that more substantive changes could be next, including potentially adding a surtax to Roth IRA distributions to effectively remove their tax-free status.

The advantage of traditional IRAs is that you grab your deduction up front, making it impossible for lawmakers to take it away later. Although most believe that the chances of major Roth IRA changes are remote, those who are risk-averse should consider that possibility in choosing their retirement vehicle.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus.



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23 Comments

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bobktmfs

It would be so very nice if all employers offered 401(k)s to their employees, but that's just not going to happen. So the next best choice is going to be some form of IRA. You can also roll an old 401(k) over into an IRA, but there will be fees involved. Learn more about how IRAs work at http://www.mutualfundstore.com/individual-retirement-account-ira. Either way, maximize your input so that you can get the most out of any growth that may accrue.

May 07 2014 at 5:11 PM Report abuse rate up rate down Reply
boston1936

I don't understand why we have to be taxed on total income less than or equal to $50K after retirement and a small flat tax isn't applied to total retirement income over $50K but not over $100K? That would help most people have more income available to them after they retire and have to rely less on public assistance. More people would feel comfortable about retiring or be able to consider it. As they retire more jobs would be available. Why must so much of the income of people who don't have much have to be taken away by the IRS and state and local governments?

Most people haven't saved enough to retire and their sources for retirement are getting limited constantly. A 401K can incur big losses as you near retirement as you near retirement substantially derailing your retirement. A Roth IRA limits how much you can save per year between $5.5K and $6.5K depending on age. Why can't those limits be as high as a 401K which allows you as much as $22.5K per year? They can help us out be reducing taxes significantly and eliminating them on incomes that are low for retirees. They don't even want to give COLAs anymore. Stop finding new ways to screw us over and start doing something to help Americans.

There is always money for bailing out anyone but US citizens. I'm sick of that!

March 26 2014 at 9:46 PM Report abuse rate up rate down Reply
ga7smi

lowest tax rates ever - pay now - deferred plans never made any sense

March 26 2014 at 9:43 PM Report abuse rate up rate down Reply
myrtlebeachsobol

What writers like this forget is the compounding that takes place over a workers career making the pot size much larger. Paying the tax later is what the Government counts on as your pot can be 5-12 times what you put in. With RMD's the Government is going to get their money and it will be a larger amount. Agree with previous comments that article is too short sighted.

March 26 2014 at 1:48 PM Report abuse -1 rate up rate down Reply
1 reply to myrtlebeachsobol's comment
moretrorun

Paying the tax later is what the government counts on? Is this the same government that imposes an estimated tax penalty for not paying up your income taxes each quarter of a year? The government wants it now, not later. While the government passes laws that don't phase in until the next person is president, they are not counting the tax money to be received 30 years from now. If anything, that is the reason for the hype of Roth IRAs. Convert those Traditional IRAs to Roths so the government can get their money now and not wait 30 years. Speaking of short-sighted.
The government used to be concerned about giving incentives for taxpayers to save money for retirement in case Social Security didn't last. Now, they are only looking for ways to get the money now. Enter the Roth IRA, complete with limitations as to who can contribute.

March 26 2014 at 2:05 PM Report abuse rate up rate down Reply
1 reply to moretrorun's comment
HiBarbRayAndMeg

Hundred reasons why the Roth IRA is a great deal.. The amount you can put in is limited each year so the government will not suffer that much in the future.. And due to compounding of your investment over many years hopefully these retired seniors will not rely on government aid in retirement.. Win win for everyone. I like the long sighted view.

March 26 2014 at 5:58 PM Report abuse rate up rate down
langkcmv

A rather poorly written article coming from a "contrarian viewpoint". Rather than focusing on the universally-acknowledged (and multiple benefits) attached to Roth IRA's, the writer seems to have assigned himself the task of finding something "wrong" with them...And is really forced to dig down into some microscopic weeds to find "something" that might be found as a negative. For the vast majority of middle-income Americans, the Roth IRA offers the potential for huge saving over their lifetimes. Yes, there's also strong points to taking advantage of employer-matching 401K's while you're working. But it shouldn't come down to a "one or the other" choice. Go with your employer's matching 401K (in order to get the "free money") when/while it's to your advantage and keep open the option of rolling the 401K into a Roth when you retire or leave that employment. Kind of a dumb article

March 26 2014 at 12:06 PM Report abuse +2 rate up rate down Reply
HiBarbRayAndMeg

Roth IRA's are fantastic. One of the best retirement ideas for the middle class. And tax rates did not go up for 99% of all taxpayers.. A poorly written article.

March 26 2014 at 11:50 AM Report abuse +2 rate up rate down Reply
howdy

I hate, did I mention hate poorly written articles.

For most Americans tax rates are STILL at historic lows. A Roth IRS is a great retirement vehicle, and so are matching funds from employers for 401K's. Taking advantage of many avenues for retirement is very smart, something are fathers and mothers did not have available to them 30 years ago.

As a side note.. The Bush tax cuts have devastated America by running up our debt during a time of two wars.. You combine that with the greed of the global recession and that is why the eonomy is in slow recovery.

March 26 2014 at 11:25 AM Report abuse +2 rate up rate down Reply
moretrorun

1) Contributions are not deductible.
2) Withdrawals may be penalized.
3) Converting into one is taxable.

Why would you want one?

March 26 2014 at 10:50 AM Report abuse -3 rate up rate down Reply
4 replies to moretrorun's comment
jdykbpl45

Tax rates always go up!

March 26 2014 at 9:15 AM Report abuse rate up rate down Reply
3 replies to jdykbpl45's comment
CHEYWOLF65

So basically you would be double taxes. I thought the whole purpose of a Roth IRA was to pay taxes first so when you retire you wouldn't pay taxes. So now they want to tax money you have already paid taxes on. I think I just might start putting my money in a mason jar and burying it in the back yard. Our government love over taxing the working people to pay for are the ones who cant get off the lazy butts. I am so fed up with this so called administration.

March 26 2014 at 8:53 AM Report abuse rate up rate down Reply
2 replies to CHEYWOLF65's comment
patmcurran

Tax rates only went up on the top 1%. The payroll tax holiday was reinstated but income taxes did not go up on 99% of the people in this country.

There is nothing in this article about being double taxed.

I sure hope that you have a financial advisor because it seems you are not aware of your surroundings.

March 26 2014 at 10:37 AM Report abuse +4 rate up rate down Reply
bestintravel

If our Government tries to mess with an established retirement plan, then that Government is a corrupt power that needs reigning in by it's citizens. Complain to your Congressman and threaten to not vote for them again . We don't accept liars in business dealing, neither should we accept them in our Government. Leave that for other corrupt Governments.

March 26 2014 at 11:56 AM Report abuse rate up rate down Reply