Roth individual retirement accounts (IRAs) have been around since 1997, offering the ability to save money on an after-tax basis. However, despite the promise of tax-free distributions, Roth IRAs do have their drawbacks. Knowing these drawbacks can help you determine whether a Roth IRA should be part of your investment strategy for saving for retirement .
The Roth IRA does not reward contributions with a tax deduction. Rather, the Roth IRA offers tax-free qualified distributions from the plan. This can benefit you if you expect to pay a higher tax rate at retirement. However, if you are in your peak earning years, you likely benefit more from a tax-deferred account, such as a traditional IRA, 401k or 403b, that allows you a tax deduction for your contributions.
When you put money into a Roth IRA, there are a few restrictions on how the money can be invested. First, the investment cannot benefit you personally. For example, you can't invest the money you put in your Roth IRA into a company you own, or into a house for you to live in. The IRS also prohibits investing in collectibles, so no matter how much a Honus Wagner baseball card will be worth in 20 years, you cannot use your Roth IRA to buy one.
A Roth IRA restricts retirement savings contributions much more drastically than employer plans, such as Roth 401k plans and Roth 403b plans. For example, as of 2011, the maximum contribution for a Roth IRA if you are under 50 is $5,000, compared to $16,500 for a 401k or 403b plan. If you are 50 or older, the limit for a Roth IRA increases to $6,000 compared to $22,000 for a 401k or 403b plan. In addition, an employer cannot match your contributions to a Roth IRA.
Account Age Requirement
With a traditional IRA, you only have to be 59 1/2 to take qualified distributions from your account. Roth IRAs not only have the account holder age requirement, but you also have to own it for at least five years before you can take qualified distributions. Tax years count from Jan. 1 of the first tax year you made a contribution to the Roth IRA. For example, if you first put money in your Roth IRA during the 2013 tax year, the tax year age of your account would be measured from Jan. 1, 2013 no matter when you made the contribution during the year.
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