This five-year rule may make it less beneficial to open Roth if you're already in middle age. Read all the disadvantages of a Roth IRA to keep an open mind. You can contribute to a Roth IRA if you fall into the marginal federal income tax category of 24% or less. However, there are strong arguments why you shouldn't contribute to a Roth IRA.
Thanks to all the wonderful comments over the years, I've been less dogmatic about the downsides of the Roth IRA. People should diversify their retirement savings for tax reasons. However, keep in mind the increase in taxes under the new administration. 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. Roth individual retirement accounts provide after-tax growth for your retirement savings. While Roth IRAs generally offer tax benefits, they're not right for everyone, and they're not even eligible to make contributions.
Knowing the drawbacks before investing your money helps you avoid early retirement penalties in the future. You don't get a tax deduction for contributing to a Roth IRA. While this disadvantage is offset by qualified tax-free distributions, this advantage is not balanced for everyone. If you pay a higher tax rate now than you expect to pay in retirement, you'll save more on your taxes if you can deduct your contributions.
For example, if you now pay a 35 percent tax rate and expect to pay only 25 percent when you retire, you'll get ahead by making a contribution to a pre-tax retirement plan, such as a traditional IRA. Every investment comes with risk, so it's a matter of deciding if a Roth IRA aligns with your financial situation and goals. While the Roth IRA is an important tax-advantaged retirement account, there are also disadvantages of the Roth IRA that are rarely discussed. Earnings from your Roth IRA cannot be withdrawn without penalty until you are eligible to receive qualified distributions.
All those taxes you paid in advance to the shrewd government and you'll never be able to use your Roth IRA returns. While there are income limits to determine who can invest in a Roth IRA, there are no income limits for conversions, so those who otherwise wouldn't be eligible can use a conversion to a Roth IRA. 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. Of course, if the choice is between NOT SAVING and saving with a Roth IRA for the future, then the answer is that you should open a Roth IRA instead of spending your money on stupid things that depreciate in value.
For these reasons, many people consider converting a Roth IRA to move money from a traditional IRA to a Roth IRA. There are a few things to know, mainly the positive and negative tax implications if you're considering a Roth IRA. And if the choice is between choosing a traditional IRA instead of a Roth IRA, choosing the traditional IRA is definitely the way to go.