The main risk of opening a Roth IRA is that you do not get the same up-front tax break you get with a traditional IRA. A traditional IRA lets you put money aside before taxes, but the money you put into your Roth IRA goes into your account after your taxes are taken. As a result, this prevents people on a tight budget from saving as much as they want, because they are forced to pay taxes on money they can’t touch for 10, 20, or even 30 years.

Contributions to a Roth IRA are made with posttax dollars, so you do not get the up-front tax break of a traditional IRA.

On the bright side, you can always withdraw your contributions (not earnings) without penalty. And, unless you are under 59½ years old, you can withdraw any of your Roth IRA money without paying any taxes, as long as you opened your first Roth account five or more years ago. Unfortunately, if you opened your account late in life, you may be subject to a 10% tax penalty. Even if you are 59½ years old but just opened your account when you were 57, you’ll have to wait an additional two-and-a-half years unless you want to pay a 10% penalty.

Another risk with Roth IRAs is that, compared to a 401(k), you can contribute much less [$6,000 per year—$7,000 if you're 50+ and can make catch-up contributions—compared to $19,000/$25,000 with catch-ups). What's more, if you make too much money, you cannot open a Roth IRA. Even if you already opened your account, you are prohibited from contributing additional money into your Roth IRA in any year when your income is above the limit.

Advisor Insight

John Riley, AIF
Cornerstone Investment Services, Providence, RI

A Roth IRA is subject to qualifier rules. Simply put, you cannot contribute to a Roth IRA in 2019 if you make more than $137,000 for a single filer or $203,000 for a joint filer. The 2019 contribution limit for a Roth IRA is $6,000, or $7,000 if you’re age 50 or older by the end of the year, or your taxable compensation for the year if it is less than the contribution limit.

The allowable contribution is also reduced as you approach the upper limits. According to the Internal Revenue Service, in 2019 you can contribute the full amount if your joint income is under $193,000, but your allowable contribution reduces as you head toward $203,000. For single filers those numbers would be $122,000 and $137,000, respectively.

Assets held within the Roth IRA also carry investment risks, but this would largely depend on the type of investments and the investor’s risk tolerance. For instance, bank certificates of deposit and Treasury notes have little to no downside risk, while stocks, bonds, and mutual funds are much more volatile.