Roth IRA Disadvantages

You have to pay the taxes today for the contributions. How is this a disdvantage?

Let's say you make $80,000 this year on taxable income, making you in the high tax bracket. If you contribute $4000 to your Roth IRA, you are taxed on that $4000 at the high tax rate. You are better off making Roth IRA contributions when your income is low (to avoid paying big taxes today) and not when your income is high.For instance, if one contributes $1000 to a traditional IRA while in a high tax bracket, you can recieve a substantial tax deduction thereby reducing the initial cost of contributions. This is not the case with Roth IRA. If during retirement one ends up in a lower income bracket than today, one will wind up with less usable cash by choosing a Roth IRA over a Traditional IRA. Please note that money in a traditional IRA is taxed once it is withdrawn at retirement.

Another major disadvantage of Roth IRA is heavy penalty for early withdrawals. Withdrawals up to the total of contributions + conversions are tax-free. However, an unqualified withdrawal of earnings will result in federal income tax plus a ten-percent penalty on the amount. Though there are exceptions to it , like buying a first home and paying qualified educational expenses, you need to be careful.

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