The main risk for 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.

On the bright side, unless you are under 59.5 years old, you can withdraw your Roth IRA money without paying any taxes. Unfortunately if you opened your account late in life, you may be subject to a 10% tax penalty. The money in your Roth IRA must stay there for at least five years, so even if you are 59.5 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 unlike a 401(k), the IRS, not your employer, places limits on how much you can put into your retirement fund. You cannot contribute more than you make to your fund, and if you make too much money, you cannot open a Roth IRA. Even if you opened your account and then made too much money, you are prohibited from contributing additional money into your Roth IRA.

The Advisor Insight

A Roth IRA is subject to qualifier rules. Simply put, you cannot contribute to a Roth IRA if you make over $133,000 for a single filer or $196,000 for a joint filer. The contribution limits for a Roth IRA are as follows:

  • For 2018: $5,500, or $6,500 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.
  • For 2019: $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.

The allowable contribution is also reduced as you approach the upper limits.

According to the IRS, you can contribute the full amount if your joint income is under $189,000, but reduces as you head towards $199,000. 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 CDs and Treasury notes have little to no downside risk, while stocks, bonds, and mutual funds are much more volatile.

John Riley
Cornerstone Investment Services
Providence, RI