What are the Pros and Cons of a Roth IRA?

Although you tend to have quite a few different options when deciding what types of tax friendly accounts you want to use for your retirement, one of the most popular types of accounts you can hold is a Roth IRA. This type of retirement account takes advantage of quite a few really beneficial rules as far as avoiding problems with income taxes at the time you're ready to withdraw the funds. However, Roth IRAs aren't perfect. So what are the pros and cons of a Roth IRA?

Tax Benefits in Roth IRAs

A Roth IRA differs primarily from traditional IRAs and 401 (k) accounts in the way that the gains in the Roth IRA account can grow with a tax deferred status. This can be a significant long term advantage to a Roth IRA. In a traditional IRA or a 401 (k) account, you will receive an income tax break on the money that you invest into the account, but only in the tax year where you're making the investment. With a Roth IRA, you won't receive any income tax break at the time you make the deposit, so those looking for immediate tax breaks will see this as a negative aspect of Roth IRAs.

Unlike a 401 (k) account, a Roth IRA account doesn't allow you to borrow money from the account without a penalty, which can be a negative. On the 401 (k) account, you will have to pay back any money you've borrowed, with interest, within at least five years, or you must pay a penalty, though. If you're withdrawing money from the Roth IRA account before the age of 59 1/2, you will have to pay a penalty on the amount you've withdrawn. However, you can have this penalty waived if you meet a certain set of rules, such as using the money to pay for especially high medical expenses.

When compared to a traditional IRA, a Roth IRA has the advantage of allowing you to leave the money in the Roth IRA account until it's actually needed. This allows the money to continue to grow tax free, which takes further advantage of the significant tax friendly component of the Roth IRA versus other types of retirement accounts. With a traditional IRA, you must begin taking withdrawals from the account at least by age 70 1/2, and these withdrawals must be made in a regular time frame until the account is closed.

Working With Roth IRA Limitations

One of the disadvantages of a Roth IRA is some of limitations that you have when making contributions to the account. You only are allowed to contribute up to $5,000 each year to your Roth IRA, or $6,000 each year for those 50 years and older. Both of these are lower amounts than you can contribute annually to a 401 (k) account. If you have a 401 (k) account with a good matching percentage from your employer, you probably should donate enough to your 401 (k) to ensure that you receive the maximum matching percentage before making contributions to a Roth IRA.

There are a few other limitations to Roth IRAs that could be considered disadvantages. For example, those who have made more than $173,000 during the year and who file their tax returns jointly cannot make the maximum contribution to a Roth IRA for that year. The allowed contribution amount is reduced, depending on the amount of money over $173,000 you made during the year. In this case, you will want to take a look at a traditional IRA, which doesn't have such limitations.

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