Disadvantages Of Roth IRAs

There are advantages and disadvantages to traditional and Roth IRAs. One disadvantage to Roth IRAs is that the funds located inside cannot be used as collateral for a loan, so are not available for financial leveraging or as a cash management tool for investment purposes. In addition, contributions are not tax deductible like they are in a traditional IRA. Someone investing in a traditional IRA will get an immediate tax savings equal to the amount of the contribution multiplied by their marginal tax rate, while someone who utilizes a Roth IRA does not have this immediate reduction in taxes.

Eligibility to contribute to a Roth IRA phases out at certain income limits and the contributions do not reduce a taxpayer’s adjusted gross income. As such, a taxpayer who contributes to a Roth IRA is deciding to pay income taxes at their current rate. This means if Congress lowers taxes or if the taxpayer ends up in a lower income tax bracket at retirement due to lower taxable income, then the taxpayer could pay more income taxes on the earnings used to make the contribution as compared to the taxes that would have been due to be paid on the funds that would have been withdrawn from a traditional IRA, if the taxpayer had gone that route. Most people have lower incomes in retirement than during their working years, and end up in lower tax brackets, so the higher the taxpayer’s current marginal tax rate, the higher the potential disadvantage.

A taxpayer who pays state income taxes and contributes to a Roth IRA will have to pay state income taxes on the amount contributed to the Roth IRA in the year the money is earned. Additionally, perceived tax benefits may never be realized if one does not live much beyond retirement. Instead it will only serve to reduce an estate that may not have been subject to tax. In order to realize the full potential of the Roth IRA, the owner must live until its entire contributions have been withdrawn and exhausted. Know more by going to http://www.ira-to-gold.com/.

Congress also has the power to change the current rules for tax free withdrawal of contributions. This means that someone contributing to a Roth IRA is assuming the risk that the rules may be changed in the time between when they contribute to the IRA and when the funds are distributed. While Roth IRAs do have some negatives, they also have positives that should be factored into your decision, as well.

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