Should you Invest in a Roth IRA?

Learn the benefits and drawbacks of a Roth IRA to decide if it’s right for your retirement plan.

If you’re busy planning for retirement, you might consider investing in an individual retirement plan — like a Roth IRA or a traditional IRA — to build up your nest egg. But what is a Roth IRA? And are there other retirement accounts that would be a better fit for you?

A Roth IRA is similar to a traditional IRA but has both tax-free withdrawal and tax-free earning benefits. Here’s a closer look at how a Roth IRA works and how contributing to one can make saving for retirement easier.

Reasons to Invest in a Roth IRA

It makes sense to invest in a Roth IRA, for several reasons. You can contribute to the account at any age, but the earlier you start, the better. Here are three other reasons to open a Roth IRA:

1. You’ll Get Federal Tax-Free Growth on Your Investment

Many people saving for retirement choose a Roth IRA because of its tax advantages. As long as your account has been open for at least five years and you are 59.5, you can withdraw your earnings without paying any taxes on them. You might also be exempt from paying state income taxes on your earnings, too, depending on your state.

Related: Save for Retirement With an IRA

2. You Can Withdraw Contributions Without a Penalty

If you’ve been contributing to a Roth IRA and need to make an emergency withdrawal, you won’t have to pay a penalty on your contributions — you can take them out at any time. If you tap your Roth for a first-home purchase, you can use any amount of your contributions, and you can also withdraw up to $10,000 of your earnings tax- and penalty-free if the account has been open for at least five years.

3. A 401k or Traditional IRA Easily Converts to a Roth IRA

If you’re already contributing to another retirement account, like a traditional IRA or 401k, you can convert those to a Roth IRA. Most financial institutions have a formal process in place to coordinate the conversion so you can keep all your funds in one place.

Related: How to Convert Your 401k to a Roth IRA

Reasons Not to Invest in a Roth IRA

Investing in a Roth IRA offers a number of benefits but there are several Roth IRA rules to keep in mind, including Roth IRA income limits. Three reasons you might not want to invest in these types of retirement accounts include the following:

1. Roth IRA Limits Can Be Stringent

The Roth IRA limit is set by the IRS and can change yearly. How much you’re allowed to contribute depends on your tax filing status and your modified adjusted gross income.

For example, if you were single during the 2016 tax year and your modified AGI was greater than or equal to $132,000, you couldn’t contribute a single dollar to a Roth IRA. If you want to invest more than the IRS allows, you’ll need to set up an alternative account.

2. You Might Pay a Penalty to Withdraw Your Earnings

You can withdraw your contributions without a penalty, but you can’t withdraw your earnings until you’re 59.5. If you withdraw earnings — and the IRS doesn’t consider it a qualified distribution — you might end up paying an additional 10 percent tax on your withdrawal. Some exceptions to this rule do exist — like being permanently disabled or having unreimbursed medical expenses that equal more than 10 percent of your adjusted gross income.

3. You’ll Pay Higher Taxes During Your Contribution Years

Because you pay income taxes on the funds you contribute to your Roth IRA during your earning years, you could end up paying more in taxes on your invested amount — until you reach retirement — than you would with a different type of retirement account. Some people prefer to defer taxes on their retirement accounts until they retire because they know they’ll be earning less, which means they’d be in a lower tax bracket and pay less in income tax, including tax on retirement account withdrawals

Keep Reading: How to Find the Best Roth IRA