What Are the Dangers of a Roth IRA?
A Roth IRA offers significant tax breaks for the money you put into the account. However, investors should be aware of several dangers.
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Withdrawals
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You cannot withdraw earnings on contributions from the account without paying a 10 percent penalty until five tax years have passed and you are at least 59 1/2 years old.
Conversions
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Each time you convert money in a traditional IRA to a Roth IRA, that conversion must remain in the account for five tax years before you can access the earnings penalty free.
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Lower Income at Retirement
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One of the major benefits of a Roth IRA is that you withdraw the contributions and earnings tax free at retirement. However, if you are in a lower tax bracket at retirement than when you make the contribution, you would have been better off contributing to a traditional IRA.
Investments
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No guarantee promises you will earn money from your investments in your Roth IRA. Riskier investments like stocks and mutual funds could lose money over time, making the benefit of withdrawing the money tax free at retirement worthless.
Lower Tax Rates
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If the federal government lowers income tax rates or eliminates income tax in favor of a sales tax or other type of tax, you won't benefit from being able to withdraw the money without it counting as taxable income.
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