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3 Reasons Not to Fund a Roth IRA

It’s important to save money for retirement because you can’t expect Social Security to cover every expense you’ll have. And when it comes to building a nest egg, you have choices.

You could fund a traditional IRA, but you’ll often hear that Roth IRAs are a better bet for different reasons, one of which is that they don’t impose required minimum distributions. (For the record, come 2024, Roth 401(k) plans won’t impose them, either.)

But while Roth IRAs have their perks, including tax-free investment gains and tax-free withdrawals in retirement, it could make more sense for you to put your money into a traditional retirement savings plan. Here’s why.

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1. You need an up-front tax break on your contributions to avoid a financial strain

When you put money into a traditional IRA, it exempts a portion of your income from taxes. And that might make it possible for you to afford to fund a retirement plan without financial strain.

But a Roth IRA won’t give you a tax break on your contributions. And in that case, parting with some of your income might prove difficult.

Let’s say that funding a traditional IRA with $3,000 saves you around $600 in taxes. That $600 might come your way in the form of a tax refund you can use to help pay your bills. With a Roth IRA, you won’t get that tax savings, and that means you might struggle with some bills in the absence of it.

2. You expect to be in a lower tax bracket in retirement

As a general rule, if you expect to be in a higher tax bracket in retirement than you are now, then a Roth IRA makes sense. But many people anticipate their income — and tax burdens — decreasing in retirement. If you’re expecting the same, then you may want to take your tax break now, while your IRS liability is higher.

Now to be clear, we don’t know what general tax rates and brackets will look like in the future, so it’s a little hard to definitively say when you’ll be on the hook for the most taxes. But if you expect a large reduction in annual income once you retire, then a traditional IRA might make more sense than a Roth.

3. You don’t trust yourself to leave your savings alone

Because Roth IRAs don’t give you a tax break on the money that goes in, there’s no penalty for taking an early withdrawal ahead of retirement, provided you only tap your principal contributions and not your gains. But that flexibility isn’t necessarily a good thing.

If you can own up to the fact that you’ve been known to tap your savings before, then you may want to push yourself to sock funds away for retirement in a traditional account and skip the Roth. If you open a Roth IRA but keep dipping in when you need or want money, you might end up dangerously short in retirement, when your options for earning an income may be more limited due to health constraints.

For many people, Roth IRAs are a great choice for retirement savings. But they may not be the best option for you. So before you open one, consider whether funding a Roth IRA will mean losing out on tax benefits and opening the door to way too much temptation.

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