Comparing the Benefits and Risks of Starting a Roth IRA

Starting a Roth IRA now could potentially be beneficial to you upon retirement. This type of account has grown rapidly in popularity since its inception, and you should definitely consider it as part of your portfolio. However, this type of account presents some risks to you as well. Here are a few of the benefits and risks of starting a Roth IRA.

Benefits

A major benefit that comes with starting a Roth IRA account is that you can take advantage of a great tax situation. When you contribute money to a Roth IRA, you will be contributing with after-tax dollars. From that point, the money can grow as much as possible, and you will not pay a dime in taxes after that. Even when you withdraw the money at the age of 59 1/2, there will be no tax liability.

This can allow you to take advantage of marginal tax rate differences. Most people are in a lower tax bracket when they are younger because they are just starting out their professional careers. When they get older, their tax brackets will usually be much higher. If you get the taxes taken care of early on in life, you will most likely pay a much lower tax rate. Then, when you get older, you can withdraw the money without worrying about the taxes.

This type of retirement account also presents you with some flexibility when it comes to withdrawals. Every other type of retirement account will charge you a 10 percent penalty if you take out money prior to turning 59 1/2. The only exception to this rule would be if you had some particular type of hardship. With a Roth IRA, you can take out the money that you have invested at any point without penalty. You will not be able to take out any of the gains from investing until retirement, but you can take out the principal anytime. This can be very handy if you ever have an emergency situation come up.

Risks

One of the major drawbacks of this type of account is that you have a contribution limit. You can put in only up to $5000 per year. This gets bumped up to $6000 per year after you turn 50. When you consider how much money you are going to need to retire, this is not a very large amount.

Another risk that comes with starting a Roth IRA is that you may not be able to contribute to it forever. With the Roth IRA, there are income limits that prevent some people from contributing. If you are single, you have to make less than $120,000 to contribute at all. You cannot contribute fully unless you make less than $95,000. If you are married, you can contribute only if you make less than $176,000. The full contribution limit is $166,000. Therefore, if your income goes up to or above these levels, the Roth IRA might just sit there until you retire or withdraw the money.

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