No Roth IRA In Your Retirement Plan? The Pros and Cons of Adding One in 2025

Everyone knows it’s important to save for retirement. And yet there are lots of people who don’t have a single dollar saved for when they stop working. Why? The reason may be as simple as they don't know where to start. If retirement is just around the corner or miles away, consider a Roth IRA in 2025.

The best reason to add a Roth IRA to your retirement plan this year is the savings on taxes, with tax-free growth potential, tax-free withdrawals, and more. Even if tax rates rise in the future, contributing to a Roth IRA now not only lets you to lock in the tax benefits at today's rates, but you can avoid higher taxes on withdrawals.

For 2025, contribution limits remain the same as in 2024, which cannot exceed $7,000 if you're under 50. If you're over 50, you get the bonus of an extra $1,000 in catch-up contributions, bringing your total to $8,000. The income phase-out range for taxpayers making contributions has increased for 2025 — singles under $150,000, married filing jointly under $236,000. But, you can't contribute more than your earned income for the year, so if you make $5,000 in 2025, you can't contribute more than $5,000.

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From restrictions on income, to contribution limits, withdrawal rules and conversion options, there's a lot to mull over for 2025. But if you want to set yourself up for a comfortable retirement, it pays to know the basics, plus the pros and cons of a Roth IRA.

What is a Roth IRA?

A Roth IRA is an individual retirement account that offers you the chance to grow your contributions and earnings over time by investing after-tax dollars in a range of different securities, like stocks and bonds, exchange-traded funds (ETFs) or mutual funds. In return, withdrawals from the account are not taxed as long as you are at least 59-½, and the account has been open for five years. But on the downside, there are income limitations on contributions to a Roth IRA, no tax deduction for contributing, and the maximum contribution is relatively low compared with some other retirement accounts.

“In 2025, there will be no real changes to the Roth IRA structure other than slightly higher AGI (adjusted gross income) levels to qualify,” writes Matt Willer, Private Asset Investments Expert with Phoenix Capital Group Holdings. “Ultimately, this account type is one of the best vehicles to hold investment securities, especially ones with yield. I am a big fan of the Roth IRA.”

Key updates for 2025:

• Contribution limits: $7,000 ($8,000 if age 50+)
• Higher income limits for making contributions: Singles under $150,000, Married filing jointly under $236,000
• Tax bracket changes due to the Tax Cuts and Jobs Act (TCJA), which is due to expire in 2025, could make Roth IRAs more attractive.

What are the pros and cons of a Roth IRA? Read on.

Pros of a Roth IRA

There's a lot to like about Roth IRAs, like tax-free growth of your investments and no required minimum distributions (RMDs). But that’s only the beginning.

1. Tax-free growth and withdrawals 

With a traditional IRA, you get an upfront tax break. Your yearly contributions may be deductible and your money will grow tax-deferred, but when you withdraw your money in retirement, you will owe income taxes. With a Roth IRA, you enjoy tax-free gains in your account and tax-free withdrawals once you're 59-½ and have had your Roth for at least five years.

So it really comes down to whether you want to benefit from a tax break now with a traditional IRA or later with a Roth IRA. If you expect your tax rate to be higher when you retire, choose a Roth.

2. No required minimum distributions (RMDs)

Unlike other retirement accounts, like 401(k)s, you aren’t forced to take required minimum distributions (RMDs) with a Roth IRA. With a 401(k), you must begin withdrawing money from your account by April 1 in the year after you turn 73. If you don’t, you may face a 25% penalty. (Sometimes, that penalty will be reduced to 10%).

A Roth IRA offers the advantage of tax-free growth for as long as you want with no RMDs. That means you can pass some (or all) of your Roth IRA on to your heirs. That said, RMDs are required for inherited Roth IRAs, but distributions generally remain tax-free.

3. Your contributions, your way 

For those times when you really need the money, a Roth IRA can be the answer. That's because you can withdraw 100% of the money you’ve contributed at any time for any reason, with no taxes or penalties — as long as the money you withdraw comes from your contributions only and not your earnings.

Unlike a Roth IRA, when you withdraw money from a traditional IRA before 59-½, you'll likely face an income tax bill and a 10% early withdrawal penalty, although this rule has some exceptions. Even so, once you withdraw the money from your Roth IRA, you can't put it back into your account, so you may lose out on potential investment growth by withdrawing funds too early.

4. Flexibility in retirement

Since you already paid taxes on your contributions to your Roth IRA, as long as you meet the requirements and play by the rules, you can take your money out, tax-free. That gives you some flexibility in retirement. When you juggle your distributions from your qualified retirement accounts, like a traditional IRA or 410(k), and your Roth IRA, you may be able to control your overall income tax liability better, as long as you don’t push yourself into a higher tax bracket.

For instance, let’s say you collect your Social Security benefits, then take some money from your 401(k) until your taxable income reaches the top of your tax bracket. After that, you can take any additional money you need from your Roth IRA, which won’t count as taxable income.

5. Contribute as long as you work, within limits

As long as you’re earning a paycheck, you can contribute to your Roth IRA, regardless of age. The only rule you must live by is staying within the I.R.S. income limits.

6. Help pay for college

“A Roth IRA can be used to save for college, and some parents may feel it is a good option because they can be setting money aside for retirement and still know that they can tap into it if needed to pay for a child's qualified higher education expenses,” says Martha Kortiak Mert, Chief Operating Officer at Saving For College. “If they don't have to use the funds for college, they will still be there for them when they're ready to retire.” But a Roth IRA offers options.

As of last year, 529 plan account holders can now make tax-free and penalty-free rollovers to their Roth IRA accounts. Although doing this may be subject to certain limitations, it can be encouraging news to families who worry about having leftover funds in their 529 plan account.

Retirement assets, including Roth IRAs, are not reported on the Free Application for Federal Student Aid (FAFSA) that students fill out when applying for grants and scholarships. However, distributions from your Roth IRA to help fund college are reported as untaxed income to the student on the FAFSA. In fact, “up to 50% of student income can be counted on the FAFSA (compared to only 5.64% of a parent asset, like a 529 plan).”

Check out this survey to learn more about when to use a Roth IRA to fund your child’s education and when it may not be such a good idea.

Cons of a Roth IRA

Despite the obvious advantages, Roth IRAs have several disadvantages worth noting.

1. No immediate tax deduction for contributing

One of the greatest disadvantages to Roth IRAs is that there is no immediate tax break on contributions since you’re using after-tax dollars. So, any money you contribute to your Roth IRA isn't tax-deductible, and you don’t report contributions on your annual tax return. Instead, you pay taxes before contributions are made to a Roth IRA.

2. Income limits

Roth IRAs limit how much you can earn, meaning the amount you can contribute to the account depends on your modified adjusted gross income. If you are below the income threshold for a Roth IRA, you can contribute $7,000 in 2025 ($8,000 if you are 50 and older). If you are above a certain income, your contribution may be reduced until it is phased out completely.

3. You must wait to withdraw earnings

Although you can withdraw contributions tax-free anytime, withdrawing Roth IRA earnings is a different story. To avoid paying taxes and penalties, you must be 59-1/2 or older and also have had the account for at least five years. If the distribution is not considered a “qualified” distribution, withdrawing earnings before retirement age could incur a 10% penalty and income taxes.

4. Low contribution limits

Although you can contribute to multiple IRAs in a year, the total amount can't exceed the annual limit. This can take Roth IRAs out of the running for people who hope to save a lot of money for retirement. Compared to other retirement accounts, like 401(k)s, that allow you to contribute $23,500 in 2025, you can only contribute $7,000 ($8,000 if you're 50 or older) in your Roth IRA in 2025.

That means you will likely need other accounts to save enough for retirement. And, since Roth IRAs have lower caps on annual contributions, you might hit some limits on contributions if you’re a high-wage earner.

5. Potential tax penalties if you contribute too much

If you Inadvertently contribute too much to your Roth IRA or make ineligible contributions, you must correct the issue by your tax filing deadline to avoid any potential tax penalties. Plus, you will need to remove all excess contributions and any investment earnings, or those earnings will be reported as income on your tax return.

Suppose you noticed you contributed too much only after you filed your taxes. In that case, you can file an amended tax return to fix your mistake, but it's possible you may still be on the hook for a 6% penalty on excess contributions each year until you’ve removed that money from the account.

For more information on tax penalties for IRA over-contributions, visit the IRS website.

Bottom line

“In my opinion, Roth IRAs should be considered an intricate part to any portfolio and retirement plan,” says Ronnie Thompson, Owner and Financial Advisor at True North Advisors. “With the probability that tax rates will go up over time, A Roth IRA creates a safe haven from higher tax rates being paid on higher investment amounts in the future. Roth IRAs protect against tax erosion and allows prudent investors the ability to avoid tax losses on distributions made during higher tax environments in retirement. That, in turn, creates a higher probability that one will not run out of money in retirement.”

Is a Roth IRA for you? Check out Roth IRAs: What They Are and How They Work for everything you need to know to make an informed decision in 2025.

Related Content

• How to Open a Roth IRA in Five Simple Steps
• Qualify for Roth IRA Contributions by Lowering Your Income
• How to Convert a Traditional IRA to a Roth After 60
• Five-Year Rule on Roth IRA Contributions and Payouts