In investment circles, we often talk about Roth retirement accounts as the “holy grail.” The combination of tax-free distributions, advantageous inheritance rules, no RMDs in retirement and withdrawals that don’t count towards your MAGI (Modified Adjusted Gross Income) for Medicare purposes is hard to beat! 

However, it’s important to remember that there are tradeoffs in every financial decision, and even putting or converting money into a Roth account can involve tradeoffs that you may not want to make. After all, your dollars are subject to taxes before they go into the Roth account—the opposite of a traditional 401(k) or IRA account, where your dollars go in tax-deferred. 

How, then, would you determine whether using a Roth IRA or a Roth 401(k) account is a bad idea for you? 

One factor is how soon you are going to need to access the money. If you are going to need the money fairly soon, any tax-free investment growth benefits to compensate for the tax you paid up front are minimized, if they exist at all. The time and effort needed to set up your Roth account may not be worth it in that case.  

A second reason that a Roth account might not be right for you is if your tax rate is higher now than you project that it will be in the future. For many adults in their 40s and 50s, they may be in their peak earning years and therefore are likely paying the highest tax rates of their lives. That is a great time to defer taxes on part of your income by putting away money in a traditional 401(k) or IRA account. It is generally not a good time to pay taxes on your income so that you can put money into a Roth account. 

A third thing to consider specifically involves situations when someone is considering converting dollars from a traditional retirement account to a Roth account. In this scenario, income tax is due on the money that is converted. If you need to use retirement funds to pay those taxes, then you will reduce the amount that gets into the Roth account when you convert the funds, and you might very well lose whatever benefit the Roth conversion was going to give you. Plus, if you are below the age of 59 ½ at the time of your conversion, any retirement funds used to pay taxes may be subject to a 10% penalty. 

There are many considerations to make when you are deciding whether or not to use a Roth account for your retirement. Roth IRAs, when funded for the right reasons and under the right circumstances, are a great tool. However, as discussed here, there are times when using a Roth account may not be the best option. 

How ever you structure your retirement accounts, invest smartly and invest well! 

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.