When Does a Roth IRA Make Sense for You?

Saving for retirement is a key part of your overall financial planning, and making the best use of tax-favored retirement accounts can make a huge difference in how big your retirement nest egg is. But with all the choices among retirement accounts out there, it can be confusing to figure out whether a Roth IRA is better than other alternatives for retirement saving.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at how Roth IRAs work and when they're the best choice for your retirement saving. Dan notes that Roth IRAs don't give you the same upfront deduction that regular IRAs offer, but they let you withdraw money in retirement tax-free. As a result, Dan points out that the big question to answer is whether your tax rate now is less than your tax rate will be in retirement. If getting an upfront deduction now wouldn't save you much in taxes compared to the rate you'll pay later, then a Roth IRA is often your best choice. If you're in a high tax bracket now, though, a Roth doesn't make as much sense. Dan concludes that you have to run the numbers and make estimates about future taxes in order to make a smart decision.

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Comments from our Foolish Readers

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  • Report this Comment On July 22, 2014, at 10:55 AM, Zinj wrote:

    One element I never see discussed is the legislative risk, by which I mean the risk that Congress changes its mind in the future and decides to tax Roth IRAs EVEN THOUGH they've already been taxed.

    A plausible scenario - 2030: Baby Boomers all over age 65, gigantic budget holes due to Congress' 50-year avoidance of addressing entitlements, an easy target is "the rich".

    In this case, "the rich" would be anyone with a Roth IRA who "has enough money already". You can imagine how that populist movement progresses -- you shave off just enough population so that RE-taxing Roth IRAs only hits like 25% of those with Roth IRAs. The rest of the Roth population and the entirety of the non-Roth population gets behind this easy source of revenue.

    I don't know how to handicap this kind of risk, but that doesn't mean it should be ignored. In a Roth IRA, you're counting on a future Congress to keep the word of today's Congress. Dubious indeed.

  • Report this Comment On July 24, 2014, at 12:25 PM, vjalukar wrote:

    I don't think it's possible to "handicap" this scenario.

    If something like this were to happen, there would be legal challenges to the double taxation. There may be grandfather clauses that would exclude accounts established prior to a certain date.

    But, who really knows what insane policies Congress may enact?

    I guess, some diversification would be the best insurance policy. Roth shouldn't be all of your holdings...

  • Report this Comment On July 24, 2014, at 12:36 PM, wolfhounds wrote:

    One thing to consider is joint social security income after retirement. If congress doesn't act to raise the minimum level subject to taxation if income is above $32k, then inflation in Soc. Sec. payments will have a disproportionate effect on people in the 15% and lower brackets. For these people it makes sense to convert over time before retirement, or as I did when retired at 62, convert over a 7 year span with minimum tax effect.

  • Report this Comment On July 24, 2014, at 3:25 PM, kabrink wrote:

    I agree with zinj. This country is rapidly going the way of Cyprus and we have a government that will have no qualms about just taking our assets directly out of our banks and brokerages overnight. They are already crafting legislation to force us to buy US debt - the last thing I want.

  • Report this Comment On July 25, 2014, at 10:36 AM, DanS wrote:

    Regardless of the consideration of tax rates, the fact that all the investment income of a Roth IRA--unlike investment income in a Traditional IRA--is tax free, is a significant factor in evaluating the benefits of Roth v. Traditional IRA. Even if your current tax rate is relatively high, you might still come out ahead by virtue of having tax-free Roth IRA investment income in the future instead of Traditional IRA investment income on which taxes will have to be paid.

  • Report this Comment On July 31, 2014, at 7:11 PM, Garp88 wrote:

    Another interesting concept in a Roth is to roll over or contribute high gain stocks in them early in the year. If the stocks increase dramatically in value, then you end up paying taxes on the lower initial price on the day they entered the Roth. If they decrease in value, then you can recharacterize your Roth back to a regular IRA before Aprol 15th of the next year, and not pay the taxes. In either case, as long as you are past 59 and a half, any dividends are tax free. Just a thought.

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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