Disadvantages of Roth IRAs

Consider these drawbacks before you open one

A Roth individual retirement account (IRA) is a retirement savings account that a person can contribute to each year and, under certain circumstances, funds can be withdrawn tax free.

The money saved in a Roth IRA can be invested in financial instruments, such as equities, bonds, or a savings account. Contributions to a Roth IRA are made with after-tax money, meaning that the contributions are made after income taxes have been withdrawn from the account holder’s paycheck.

Roth IRAs offer a long-term tax benefit since withdrawals of contributions and investment earnings are not taxed in retirement. However, Roth IRAs may not be the right retirement account for every individual. Although there are benefits to Roth IRAs, there are also distinct disadvantages that should be considered.

Key Takeaways

  • Roth individual retirement accounts (IRAs) offer several key benefits, including tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions (RMDs). However, they have drawbacks as well.
  • One key disadvantage: Roth IRA contributions are made with after-tax money, meaning that there’s no tax deduction in the year of the contribution.
  • Another drawback is that withdrawals of account earnings must not be made until at least five years have passed since the first contribution.
  • This five-year rule may make Roths less beneficial to open if you’re already in late middle age.
  • Roth IRAs’ tax-free distributions may not be advantageous if you’re in a lower income tax bracket when you are retired.

Roth vs. Traditional IRA

Roth and traditional IRAs are both excellent ways to stash money away for retirement. However, there are annual contribution limits.

For 2021 and 2022, individuals can contribute a maximum of $6,000 each year, or $7,000 if they’re age 50 or older.

To contribute to either, you must have earned income, which is money earned from working or owning a business. Also, individuals cannot deposit more than what was earned in a given year.

Despite these similarities, the accounts are actually quite different. Below are the disadvantages to Roth IRAs.

Roth IRA Income Limits

One disadvantage of the Roth IRA is that you can’t contribute to one if you make too much money. The limits are based on your modified adjusted gross income (MAGI) and tax filing status. To find your MAGI, start with your adjusted gross income (AGI)—you can find this on your tax return—and add back certain deductions.

In general:

  • You can contribute the full amount if your MAGI is below a certain amount.
  • You can make a partial contribution if your MAGI is in the phaseout range.
  • If your MAGI is too high, then you can’t contribute at all.

Below is a rundown of the Roth IRA income and contribution limits for 2021.

2021 Roth IRA Income and Contribution Limits
Filing Status MAGI Contribution Limit
Married filing jointly    
  Less than $198,000 $6,000 ($7,000 if age 50+)
  $198,000 to $207,999 Begin to phase out
  $208,000 or more Ineligible for direct Roth IRA
Married filing separately*    
  Less than $10,000 Begin to phase out
   $10,000 or more Ineligible for direct Roth IRA
Single    
  Less than $125,000 $6,000 ($7,000 if age 50+)
  $125,000 to $139,999 Begin to phase out
  $140,000 or more Ineligible for direct Roth IRA

Roth IRA income and contribution limits for 2022:

2022 Roth IRA Income and Contribution Limits
Filing Status MAGI Contribution Limit
Married filing jointly    
  Less than $204,000 $6,000 ($7,000 if age 50+)
  $204,000 to $214,000 Begin to phase out
  $214,000 or more Ineligible for direct Roth IRA
Married filing separately*    
  Less than $10,000 Begin to phase out
   $10,000 or more Ineligible for direct Roth IRA
Single    
  Less than $129,000 $6,000 ($7,000 if age 50+)
  $129,000 to $144,000 Begin to phase out
  $144,000 or more Ineligible for direct Roth IRA

Married filing separately and heads of household can use the limits for single people if they have not lived with their spouse in the past year.

Backdoor Roth IRA

There’s a tricky but perfectly legal way for high income earners to contribute to a Roth IRA even if their income exceeds the limits. This is called a backdoor Roth IRA, and it entails contributing to a traditional IRA and then immediately rolling over the money into a Roth account.

Needless to say, this must be done strictly by Internal Revenue Service (IRS) rules.

Roth IRA Tax Deduction

The biggest difference between traditional and Roth IRAs appears when the taxes are due.

With a traditional IRA, you deduct your contributions in the year when you earn them. This provides an immediate tax break that leaves you with more money in your pocket. The downside is that income taxes are due on both your contribution and the money it earns when you make withdrawals during retirement.

Roth IRAs work the opposite way. You don’t get an up-front tax break, but withdrawals in retirement are generally tax free.

That sounds good, but it actually can be a disadvantage for some investors.

You make Roth IRA contributions with after-tax dollars, so you don’t get the up-front tax break that traditional IRAs offer.

Here’s why: No up-front tax break means that you’ll get less money in your paycheck to spend, save, and invest. And tax-free withdrawals in retirement are something to look forward to—unless you’ll be in a lower tax bracket in the future than you are now.

Depending on your situation, you could benefit more from a traditional IRA’s up-front tax break and then pay taxes at your lower rate in retirement. It’s worth crunching the numbers before you make any decisions, since there’s potentially a lot of money at stake.

Roth IRA Withdrawal Rules

With a Roth IRA, you can withdraw your contributions at any time, for any reason, without tax or penalty. And qualified withdrawals (which include contributions and account earnings) in retirement are also tax- and penalty-free. To be qualified, the withdrawals happen when you’re at least 59½ years old and it’s been at least five years since you first contributed to a Roth IRA—also known as the five-year rule.

If you don’t meet the five-year rule, then any earnings that you withdraw could be subject to taxes or a 10% penalty—or both, depending on your age:

  • Ages 59 and younger: Withdrawals of earnings are subject to taxes and a 10% penalty. You may be able to avoid the penalty (but not the taxes) if you use the money for either a first-time home purchase or certain other exemptions.
  • Ages 59½ and older: Withdrawals of earnings are subject to taxes but not penalties.

The five-year rule can be a disadvantage if you start a Roth later in life. For example, if you first contributed to a Roth at age 58, you have to wait until you’re 63 years old to make tax-free withdrawals.

Can I withdraw contributions without triggering the five-year rule?

Yes. Your contributions can be withdrawn at any time without penalty or taxes. Only earnings are subject to the five-year rule.

What is my modified adjusted gross income (MAGI)?

Your modified adjusted gross income (MAGI) is your adjusted gross income (AGI) with a few deductions added back in. Deductions reapplied include half of self-employment tax, deductions for student loan interest, rental losses, and more.

Do Roth and traditional individual retirement accounts (IRAs) have the same income limits?

No. There are no income limits to contribute to a traditional individual retirement account (IRA). Roth IRAs base your ability to contribute the maximum of $6,000 for 2022 on your MAGI. People over age 50 can contribute an additional $1,000 catch-up contribution. However, the deduction for your contributions to a traditional IRA may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

The Bottom Line

Roth IRAs offer many benefits—tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions (RMDs) starting at age 72. However, there are potential drawbacks.

Typically, individuals benefit from saving for retirement in an IRA. Whether the better option is a traditional or Roth IRA depends on several factors, including your income, age, and when you expect to be in a lower tax bracket—now or during retirement. Please consult a tax expert, financial planner, or financial advisor to help you make a more informed decision so that your retirement plan is customized for your specific financial situation.

Article Sources

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  2. Internal Revenue Service. “IRS Announces 401(k) Limit Increases to $20,500.”

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  4. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

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  6. HealthCare.gov. “How to Count Income & Household Members: What to Include as Income.”

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  12. Internal Revenue Service. “Retirement Topics — Exceptions to Tax on Early Distributions.”

  13. Internal Revenue Service. “Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs),” Page 9.

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