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5 Reasons to Avoid a Roth IRA

Hopefully everyone knows at this point in time that saving for retirement is key. One of those amazing tools is a Roth IRA. However, many people that qualify are still not investing in one! So, here are five possible reasons why someone would avoid investing in a Roth IRA. Maybe they apply to you:

1. You Plan to be Poorer in Retirement:

One of the biggest benefits of a Roth IRA is that you contribute money to it that has already been taxed. So, if you plan on being in a higher tax rate at retirement, a Roth IRA is a great vehicle. However, there may be some College Investors out there that plan on having less income in retirement, then a Roth isn’t for you since your tax rate may be lower. Keep in mind, however, that tax rates today are at historical lows. For most investors coming out of college, we will most certainly face higher tax rates in retirement, even at the same income levels.

2. You Want to Lock Your Principal In:

Another great aspect of the Roth IRA is that you always have access to your contributions penalty free (you just can’t touch your earning without an early withdrawal penalty before 59 1/2) . However, this may give some investors an incentive to touch their IRAs. If you fall into this area, keep to your 401(k)s, and face the high penalties for trying to get at your money!

3. You Want Your Future Children To Pay Large Tax Bills:

With a Roth IRA, if you leave your children or grandchildren as your beneficiary, they are able to have tax-free distributions from the account, just as you would have been able to. However, maybe you are angry at them and want them to pay taxes. If that is the case, keep to your standard brokerage account and smile from the afterlife as they cut Uncle Sam a check in April! Now that I’m learning how to file tax return online I’m no longer scared to handle most tax issues.

4. You Hate Investment Options:

For some people, choices are overwhelming. With a 401(k), you usually only get a defined set of choices to invest in. However, with a Roth IRA, you can invest in hundreds of different vehicles. This allows for great flexibility. If this isn’t your thing, stay away from a Roth IRA.

5. You Plan on Giving it all Away:

If you plan on donating your IRA to charity, then a Roth IRA isn’t for you, as the charity will have to pay taxes. The best way to go is to have a traditional IRA for charity. If you fall into the category, The College Investor is starting a personal charity, and I urge you to contact me using the link at the top of the page!

Crystal’s Question:  Do you invest in a Roth IRA?  Why or why not?

22 thoughts on “5 Reasons to Avoid a Roth IRA”

  1. Rob Ward

    I sure do! I haven’t contributed to mine in a few years since I am focusing on paying down my debt. But you can bet that I will be contributing again once more debt is paid off.

  2. MikeS

    I’m lucky that my company offers a Roth 401k. So, I contribute to both the regular 401k and Roth 401k. I contribute enough in the regular 401k to get the maximum company match and then everything else goes into the Roth. I do it mainly for tax diversification. I don’t know if my taxes will be higher or lower in retirement, so I’ll hedge my bet.

  3. Holly

    Not everyone can qualify for a Roth since there are income restrictions.

    Nice list! It’s funny…I used to avoid investing with a Roth because I always thought, “Well, of course we will have less income and lower income taxes in retirement! We’re retired!!!” But I didn’t have much knowledge about personal finance. Now I understand that income tax rates are not static and the gov’t can and will change those rates whenever they want!

    We use MikeS.’s approach…we invest in DH’s 457(b) and in a Roth for diversification.

  4. Everyday Tips

    I think a Roth IRA is a great option. But like you said, you have to have the self-control to not touch it…

  5. Robert @ The College Investor

    Self-control is a huge part of investing, but there are a lot of ways to make it easier.

    You can have automatic deposits so that you don’t have to worry about it. You can invest in simple index funds, so that you don’t have to make a lot of choices. You can also choose an outside brokerage (not part of your bank), so that it just adds one more “hoop” you have to jump through if you want to touch it.

  6. Jackie

    Cute post — it makes you think. I do have a Roth IRA, and a Roth 401k.

  7. Newlyweds on a Budget

    I plan on getting a ROth IRA for me and my husband in 2011. We’ve been focused on paying off debt, but that will probably be the first thing we do once our credit cards are at 0

  8. Henway

    I dun invest in any IRA, even though I should. I’m just 26 years old, so I think I got some time to play around and see if I can hit the homerun…

  9. Jenna

    I feel like a Roth IRA is great for those just starting out after college. Add to in for awhile and when you get a little more secure and just let it sit and grow.

  10. Money Reasons

    If you make too much, the Roth IRA isn’t an option! But I believe the Roth 401k still is 🙂

    I agree with Jenna, a Roth IRA is great for those starting out or if you place of employment doesn’t offer a retirement plan…

  11. Ninja

    Although I am a huge fan of the Roth IRA and invest in it myself, each person should decide if it is a good investment option for them. It’s primarily better if you plan to be in a significantly higher tax bracket when you retire. WHEN YOU RETIRE. This means your taxed retirement monthly income needs to exceed your current income. Many people end up being in a lower tax bracket come retirement and therefore benefit from traditional IRA’s and the like.

    That’s my two cents at least.

  12. Robert @ The College Investor

    Great point Ninja. I targeted this mainly to College Students, where the money they earn now is most likely taxed lower since they usually earn less than they will in the future!

  13. Sunil from The Extra Money Blog

    Ninja said it best – the Roth IRA was my first investment vehicle and i made sure i maxed out every inch of it until laws prevent from doing so anymore. i do the same today with other retirement plans.

    each of the points above can be debated at length. they are true facts, but are they reasons one shouldn’t consider a roth? hmm, debatable. i would guess the points apply to a minority, rather than to the norm. like Ninja said, one should evaluate the vehicle based on their individual goals and objectives. in my opinion, while acknowledging that the points above are valid, there are not many better investment vehicles than the roth.

  14. Joe Plemon

    Great title hook. I was putting my Roth boxing gloves on until I realized you were messing with us (at least in points 3 and 4). Clever post. And yes, I have a Roth.

  15. Working mom of 2

    In “The Gospel of Roth- The Good News About Roth IRA Conversions and How They Can Make You Money” by John Bledsoe it clearly states in the book that NO ANALYSIS is needed and that everyone should convert to a Roth IRA regardless of income. There is NO risk! The IRS is giving us a year to recharacterize or “undo” the conversion. This book gives the ins and outs for Roth IRAS! It really helped answer all my questions.

  16. frugalscholar

    I don’t know… you seem to be straining for reasons (like wanting your kids to pay big tax bills–if you don’t like your kids, don’t leave them your money). My college age kids, btw, have just started their own Roths, though with very paltry incomes. Every little bit helps.

  17. Evan

    I like having it all! Why not hedge your bets with both a Roth (if you are under the income amount) and the Traditional IRA this way you can make a decision 30 years from now rather than being forced with just one kind

  18. RobbieBobby

    Roth IRAs are the best. This year, my income was too high to contribute. But then I learned of a bit of a tax loophole, if you will. In the past, you could contribute to a traditional IRA and roll your investment over to a Roth IRA, but there were income limit restrictions. Well, the restrictions were lifted this year. So contribute to a traditional, and then roll it over to a Roth IRA. Boom!

  19. Jenny

    I feel like a Roth IRA is great for those just starting out after college. Add to in for awhile and when you get a little more secure and just let it sit and grow.

  20. james

    Honestly these days it is best to just keep your money under your bed. I swear the way things are going. I would avoid a roth IRA.

  21. james

    In “The Gospel of Roth- The Good News About Roth IRA Conversions and How They Can Make You Money” by John Bledsoe it clearly states in the book that NO ANALYSIS is needed and that everyone should convert to a Roth IRA regardless of income. There is NO risk! The IRS is giving us a year to recharacterize or “undo” the conversion. This book gives the ins and outs for Roth IRAS! It really helped answer all my questions.

  22. Hanna

    yes!it is your modified adjusted gross that they look at for ROTH contributions.

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