Workers who don't have access to employer-sponsored retirement plans can choose to fund IRAs instead, the two main types of which are the traditional and Roth varieties. And even though Roth IRAs impose income limits for contributions, many personal-finance experts love these accounts for the numerous benefits they offer. In fact, my esteemed colleague Sean Williams has even gone so far as to call the Roth IRA the greatest retirement savings tool out there.
But while there are certainly a number of good reasons to put money into a Roth IRA, these accounts don't make sense for everyone. Here are a few reasons not to choose a Roth.
1. You need a tax break today
One key difference between a traditional and Roth IRA is that with the former, the money you contribute goes in tax-free, thereby resulting in an immediate tax break. The flip side to that is having to pay taxes on withdrawals in retirement -- a fact countless seniors bemoan. Still, if you're desperate to lower your taxes at present, you'd be wise to stay away from a Roth IRA, because you won't get any up-front benefits for contributing to such an account. Rather, you'll have to wait until retirement to reap the benefits of tax-free withdrawals, and that's a long time to sit tight.
2. You have no family
One downside to funding a traditional IRA is that you must take required minimum distributions, or RMDs, starting at age 70 1/2. This means that your can't money can't sit in your account forever, but rather, you're forced to withdraw your balance over time. Roth IRAs, by contrast, don't impose RMDs, so they're a great option for those looking to leave money behind to their heirs. But if you don't have any family, and therefore aren't concerned with leaving behind a financial legacy, this benefit won't do anything for you.
3. You don't know what tax rates will look like in the future
Thanks to the recent tax overhaul, almost all individual income tax brackets went down in 2018, which means workers and retirees alike are paying less tax this year on their highest dollars of earnings than they were in 2017. Now the benefit of a Roth IRA is that you essentially get to lock in your current tax rate on the money you contribute while eliminating the risk of brackets going up by the time you reach retirement. But what if the opposite ends up happening? What if, instead of tax rates rising across the board, they wind up even lower than they are today? It's a possibility we can't discount, and if it happens, you'll lose out by not having taken that tax break up front.
4. You can't trust yourself with that money
Because you get an up-front tax break for funding a traditional IRA, you'll generally face steep penalties if you withdraw funds from that account before age 59 1/2. But Roth IRAs work differently. Since you're funding a Roth with after-tax dollars, you're allowed to access the principal portion of your balance at any time, and for any reason, since the IRS has already gotten its share of that money. But this flexibility is both a blessing and a curse, because while it's nice to have access to that cash, if you open a Roth, you may be tempted to blow through that money sooner, thus causing yourself to come up short in retirement.
Remember, any time you remove funds from a retirement account, you don't just lose out on the principal you withdraw; you also lose out on its growth potential. So imagine you take a $20,000 withdrawal from your Roth IRA at age 50 to pay for a dream vacation. By the time you retire at 70, you won't just have $20,000 less in that account; you'll have $77,000 less, assuming your investments could've generated an average annual 7% return, which is still a few points below the stock market's average. And that's why you should steer clear of a Roth IRA if you don't trust yourself to leave your money alone during what should be its growth period. Otherwise, you'll risk not having enough to support yourself during your golden years.
Let's be clear: There are plenty of good reasons to house your retirement savings in a Roth IRA. At the same time, these accounts aren't for everyone, so it pays to be aware of the drawbacks mentioned before making your decision.