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While contributions into a Roth IRA are not tax deductible, they are able to grow tax-free. 1 The other big consideration when opening a Roth IRA is cost. Investors can save significant amounts over the long term by choosing a company that charges low fees to open and maintain a Roth IRA.
A contribution to a Roth IRA does not reduce your AGI in the tax year you make it. Roth contributions are funded with after-tax dollars, meaning there's no deduction at the time of your deposit; however, when the money is withdrawn from the account (presumably after you retire), no income tax is due on it.
In general, if you think you'll be in a higher tax bracket when you retire, a Roth IRA may be the better choice. You'll pay taxes now, at a lower rate, and withdraw funds tax-free in retirement when you're in a higher tax bracket.
Roth IRA pros | Roth IRA cons |
|---|---|
Tax-free growth and withdrawals in retirement. | No tax deduction for contributing. |
Not subject to required minimum distributions (RMDs) during your lifetime. | There is an income limit to contribute. |
Contributions can be withdrawn at any time without penalty or taxes. | Earnings can’t be withdrawn tax-free until age 59 ½ and the account is at least 5 years old. |
Diversification in retirement, so all of your accounts aren't tax-deferred. | The maximum contribution is relatively low compared with a 401(k). You'll probably need other accounts to save enough for retirement. |
The Bottom Line. In a 401(k) vs. Roth IRA matchup, a Roth IRA can be a better choice than a 401(k) retirement plan, as it typically offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.
If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you're married and filing jointly, your MAGI must be under $228,000 for tax year 2023 and $240,000 for tax year 2024.
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