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Roth nest egg on top of a pile of cashRetirement savers fund Roth IRAs with after-tax dollars but can later withdraw earnings free from income taxes. One Roth IRA benefit compared to other retirement accounts is that savers don’t have to start withdrawing funds at age 72. Roth IRA owners have limited access to earnings on contributions until age 59.5, however. And their overall usefulness compared to tax-deferred individual retirement accounts (IRAs) can depend on hard-to-predict variables, including future tax rates. If you’re ready to make decisions about how to save for retirement, a financial advisor could help you put a retirement plan together for your goals and needs. 

Roth IRA Background

The Taxpayer Relief Act of 1997 authorized Roth IRAs. U.S. Sen. William Roth of Delaware, who championed the concept, lent his name to the new retirement saving accounts.

Originally intended to encourage middle-income people to save for retirement, Roth IRAs have recently drawn criticism as an unfair tax dodge for high-income taxpayers. Legislators have proposed to eliminate the so-called “backdoor” provisions that benefit high-income taxpayers. However, aside from some modifications imposed by subsequent legislative initiatives, Roth IRAs survive in close to their original form.

Roth IRAs are easy to open at many banks and financial institutions. And you can put a wide range of securities into these accounts, from certificates of deposit and savings accounts to stock mutual funds and even cryptocurrencies.

IRAs predate Roth IRAs by about two decades. Both account types give retirement savers useful tax breaks. However, they take opposite tacks to do that. Original IRAs give taxpayers a current-year deduction for contributions. Roth IRAs, on the other hand, are made with after-tax dollars. Another difference is that later IRA withdrawals pay income taxes at whatever the account owner’s rate is at the time. Roth IRA withdrawals incur no federal income taxes. The difference gives retirement savers useful financial options.

Roth IRA Pros

Red circle around "Roth" on a piece of paper

The main benefit of Roth IRAs consists of avoiding taxes on earnings when they are later withdrawn. In other words, earnings accrue tax-free and can be taken out without incurring taxes either. This benefit’s value depends on account owner age and income level and, especially, whether and how the owner’s tax situation changes between the time contributions get made and the time withdrawals start later in life.

Essentially, taxpayers whose taxes are higher after retirement win with Roth IRAs. Those in lower post-retirement brackets, however, do better with regular IRAs. If tax brackets don’t change over a saver’s life, Roth IRAs and regular IRAs give the same outcome.

Another Roth IRA benefit compared to other retirement accounts is that savers don’t owe income taxes on contributions withdrawn before age 59.5. Taxes plus a 10% penalty are due on any earnings withdrawn before 59.5. And, if the Roth IRA is less than five years old, withdrawn earnings get hit with taxes and a penalty regardless of the owner’s age.

Roth IRA owners don’t have to make required minimum distributions (RMDs). Regular IRA owners must start taking that at age 72. RMDs can lead to increased tax obligations, so this can be a significant Roth IRA benefit.

Roth IRA outcomes and benefits depend on a number of factors, only some of which can be controlled. For instance, tax rates may change in the future. Taxpayers can control some factors by, for instance, choosing to retire in a state with low or no state income taxes.

Roth IRA Cons

The major downside of a Roth IRA compared to a regular IRA is that savers can’t deduct contributions from current income for tax purposes. Compared to regular brokerage accounts and other non-tax advantaged accounts, a Roth IRA disadvantage is that savers have to wait until age 59.5 to withdraw earnings without penalty.

Contributions also are limited. For 2021 and 2022, total annual contributions to all IRAs, including traditional and Roth IRAs, can’t exceed $7,000 for savers age 50 and over and $6,000 for savers under age 50.

Due to income limits, people who earn too much can’t use Roth IRAs at all. Married couples filing jointly with an adjusted gross income over $206,000 can’t contribute to Roth IRAs. Single filers are barred if they earn more than $139,000. At somewhat lower levels of income, savers may be able to save smaller amounts in Roth IRAs.

Bottom Line

Retired couple with cash from their Roth IRARoth IRA’s tax advantages make them good retirement savings accounts for young people who expect to be in higher tax brackets later in life. Traditional IRAs may be better options for older, high-income earners, although the elimination of the RMD requirement can be a sizable plus for retirees at any income level.

Tips on Retirement Planning

  • Decisions about retirement saving are complex and solutions vary from person to person. A financial advisor can help guide you through the process. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Check out SmartAsset’s no-cost retirement calculator to get a quick estimate of how you’re doing in preparing for retirement.

Photo credit: ©iStock.com/jygallery, ©iStock.com/zimmytws, ©iStock.com/LightFieldStudios

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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