Five Roth IRA Pitfalls Your Adviser May Not Tell You About

There's a reason financial experts have long touted Roth IRAs as an optimal savings tool. Roth IRAs offer a number of key benefits that traditional retirement plans can't match. But like Pooh's Heffalump trap (which eventually captures Pooh and Piglet), it's all too easy to fall prey to your own best-laid plans if you don't understand what you're dealing with.

Your financial adviser may remind you that traditional IRAs provide a tax break on funds contributed, and earnings get to grow on a tax-deferred basis. However, when it comes time to withdraw those funds, retirees are then dealt the blow of taxes on withdrawals.

Worse yet, traditional IRAs eventually require savers to draw down their funds in the form of required minimum distributions (RMDs). Those not only result in a loss of tax-deferred gains but also create what could be a substantial tax liability.

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Roth IRAs, on the other hand, do not offer a tax break on contributions. Instead, they offer tax-free gains and withdrawals, both of which could be invaluable to Americans who wind up in a higher tax bracket than expected later in life.

Furthermore, Roth IRAs don’t impose RMDs, which means savers can enjoy tax-free gains in their portfolios indefinitely. For this reason, Roth IRAs can also function as estate-planning mechanisms, allowing savers who don’t need all their money in retirement to leave a legacy behind to their heirs — and a tax-advantaged one at that.

But there’s a dark side to Roth IRAs that isn’t talked about as much. And it’s important to understand the pitfalls.

1. This Roth IRA pitfall bars higher earners from direct contributions

There are no income limits associated with traditional IRA contributions. Not so with Roth IRAs. Higher earners commonly hit a snag by not being able to fund a Roth IRA directly.

The income thresholds at which contributions are barred change annually. In 2025, direct Roth contributions are off the table for single tax filers earning $165,000 or more, or married couples filing jointly earning $246,000 or more.

Of course, there may come a time when Roth IRA income limits are lifted. The country is deep in the throes of a retirement savings crisis, according to Aaron Tallen, VP, Head of Distribution Ops & 401k Defined Contributions at Security Benefit. So lawmakers may opt to change the rules to incentivize people to save for retirement.

For now, Tallen says, “People need to realize they can take advantage of conversions.” But that introduces a world of complications, as Roth conversions done in one fell swoop could have serious tax implications.

2. There's still uncertainty around taxes

Some financial experts say that we’re in a period of historically low tax rates. But ultimately, we don’t know what the future holds for tax rates. And that’s another potential pitfall of Roth IRAs.

The nice thing about Roth IRAs is that they offer protection against future increases. But Tallen warns that it’s not a given that you’ll be in a higher tax bracket in retirement than you are today.

"There's the uncertainty of ‘I know where my tax bracket is today, but I have no idea what my tax obligation will be in the future,’" he says. Tax code changes and life circumstances could make it so that the time to optimize tax breaks on retirement savings is during your working years, not retirement, making a Roth IRA a less optimal choice.

3. It's almost too easy to take an early withdrawal

Since Roth IRAs don’t give you a tax break on contributions, you’re free to withdraw your principal contributions at any time without a penalty. That might seem like a great thing, since it gives you flexibility. But Terry Parham, Co-Founder, Financial Planner, CFO, and CCO at Innovative Wealth Building, says it’s not.

"It's a less effective forced savings," he explains. And that worries him, because if Roth IRA savers don’t have early withdrawal penalties to worry about, they might raid their accounts ahead of retirement and get stuck with a shortfall later on.

4. You need tax diversification to take advantage of IRS benefits

While Parham is a fan of Roth IRAs, he feels that having 100% of one’s money in a Roth account is not a great thing.

"Tax diversification is the name of the game," he says. “You should have some level of pre-tax assets [in retirement] to get certain tax benefits.”

For example, Parham says, it’s not unusual for well-off individuals to want to donate to charity during retirement. But people in that boat can potentially benefit more from traditional IRAs than Roth IRAs. That way, they get the up-front tax break on the money they put in plus the tax break on qualified charitable donations (QCDs) once RMDs come into play.

“There's no tax break for doing a QCD from a Roth IRA,” Parham explains. “So you're better off getting the tax break on the traditional IRA and then doing a QCD.”

Parham also notes that we don’t know what tax breaks may be coming down the pike. “It could be that there’s a new non-refundable tax credit the IRS makes available,” he says. “If you don't have enough income, you don't get the credit.”

For this reason, Parham warns against going all-on on Roth IRAs. Having some taxable retirement income isn’t a bad thing, he insists.

5. There's no employer match

While this Roth IRA pitfall may be fairly obvious, it bears stating in full. With a 401(k) you usually can earn a company match, but that's not an option with Roth IRAs. In general, if you have access to a 401(k), you should deposit enough funds to get the full employer match and only then contribute to your IRA. For more details on deciding between the two, read IRA vs 401(k): Should You Pick One — or Both?

Read More

• IRA Conversion to Roth: Rules to Convert an IRA or 401(k) to a Roth IRA
• The Average IRA Balance by Age
• 'You Can't Take it With You' — Four Things You Lose in Retirement
• How to Convert a Traditional IRA to a Roth After 60