A disadvantage of a Roth IRA is that you can't contribute to it if you make too much money. The limits are based on your modified adjusted gross income (MAGI) and your tax-filing status. To find your MAGI, start with your adjusted gross income (AGI), you can find it on your tax return and add certain deductions. Learn more about some of the drawbacks of Roth IRAs, including contribution limits, tax issues, and penalties.
Roth IRAs offer tax-free withdrawals for Future You. However, if you're struggling to save, taking a tax deduction now by contributing to a traditional IRA might be just the carrot you need to keep your retirement savings on track. In this video from the Motley Fool Live Financial Planning series, Robert Brokamp, Fool's longtime financial planning and retirement expert, discusses the downsides of a Roth IRA. As he explains, the most important factor is whether you get more value from a tax break now than from tax-free treatment later on.
Paying income tax at the time of conversion, which could be substantial, is the main disadvantage of converting to a Roth IRA. If you expect to have a lower income tax rate in the future, converting to a Roth IRA may not have any tax benefits. In addition, calculating the amount of taxes can be complicated if you have other traditional IRA, SEP or SIMPLE accounts that you are not converting. In addition, there are no minimum distributions (RMDs) required from a Roth IRA when you turn 72, so if you don't need these funds, they can stay in your account and transfer them to your beneficiaries.
A Roth IRA is an alternative type of individual retirement account that allows people to make after-tax contributions and leave their money in the account to grow throughout their lives. All funds withdrawn from your IRA to pay taxes would be considered a distribution and could result in higher taxes than expected in the year of the Roth IRA conversion, especially if penalties are imposed as a result of the withdrawal. Also note that a Roth IRA is simply a tax-advantaged account that you use to invest; investments are those that carry risks. You may be able to transfer amounts from traditional IRAs and some other types of retirement accounts to other IRAs, including Roth IRAs.
There's a chance that you'll pay less taxes overall with a Roth IRA than with a traditional IRA if it seems likely that you'll be in a higher tax bracket in the future. For these reasons, many people consider converting a Roth IRA to move money from a traditional IRA to a Roth IRA.