When you’re thinking about putting money aside to see you through in your golden years, a Roth individual retirement account (IRA) is a popular choice to consider.

Of course, you shouldn’t rush to use any type of financial product without knowing about the drawbacks as well as the selling points, so what positive and negative aspects of a Roth IRA do you need to be aware of before deciding?

Why you should save for retirement, and when to get started

The good news is that it’s never too soon, or too late, to open a retirement online account. And while there may be several options to choose between, the simple fact that you’re accumulating cash to use after you give up work for good is a wise move.

If you haven’t got a financial cushion to fall back on post-retirement, it can be a real shock moving from a working salary to a basic fixed income. By saving, you’ll be able to enjoy life, rather than being plagued by money worries.

Even if you’re already a decent way into your career, starting to save for retirement now is still sensible. You just might have to put a larger proportion of your income aside to catch up with early adopters.

The pros of a Roth IRA

The upsides to investing in a Roth IRA are many and varied, hence why so many people have this type of account. They include:

Tax-free investment growth

Anything you put in your Roth IRA is paid in after you’ve been taxed, not before. So the idea is that you can take money from your weekly or monthly pay packet, then transfer this to your account without needing to anticipate any additional taxation on top.

This includes when you eventually extract the pot you’ve accumulated when you do retire, giving you a tax-free way to benefit from investments, and letting you avoid many of the challenges of taxation.

Withdrawals aren’t a requirement

There’s no minimum distribution in place on a Roth IRA, so that means you can choose to leave the money in the account indefinitely.

You might choose to do this as a means of investing with a view to passing this on to the next generation as a gift in your will, for example.

There’s a small penalty for taking out earnings early

With a lot of retirement savings schemes, you’ll be penalized significantly if you decide to pull your earnings out before the pot matures, or even prevented from doing so altogether.

With a Roth IRA, there’s only a 10 percent early withdrawal fee on earnings in most cases, so if you do decide to cash out sooner rather than later, you won’t suffer as significantly as you might with an alternative account.

You can contribute whatever your age

While the earliest point at which you can withdraw from a Roth IRA is at age 59 and a half without the aforementioned penalty, you don’t have to worry about being prevented from paying in beyond this point.

So if you don’t plan to retire until later in life, you can still build up your pot when you’re in your 70s or beyond.

The cons of a Roth IRA

You need to weigh up the issues with taking out a Roth IRA in order to know if it’s right for you, and there are a few to consider, such as:

It’s not suitable for high earners

If your income is above $144,000 in 2022, you’ll be ineligible to contribute to a Roth IRA. That means those with incomes at the upper end of the scale will need to look elsewhere for their retirement investment opportunities.

You can’t deduct your contributions from your tax bill

The fact that you contribute to your Roth IRA after tax also means that you can’t use these as deductions from your bill each financial year.

You can’t withdraw anything for the first five years

While there’s no maximum age for opening and contributing to a Rother IRA, you need to wait half a decade from when the account is opened before you’re allowed to make any withdrawals. That’s fine if you’re younger, but for older individuals it does throw a potential spanner in the works, depending on your retirement plans.

Annual contributions are capped

Under-50s and over-50s have different limits on how much they can pay into a Roth IRA each year. At the moment this is $6,500 and $7,500 respectively. Plus you can only deposit money you’ve earned through work or as a business owner, and you cannot pay in more than your annual income.

Final thoughts

If you’re eligible and the positives of the Roth IRA outweigh the downsides, then opening up this type of retirement account makes sense. If you’re in any doubt about the suitability, speak with a certified financial advisor.

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