When Not to Open a Roth IRA

A Roth IRA allows investors to invest their after-tax retirement savings without having to worry about paying taxes on the gains and without having to take required minimum distributions when they reach the usual starting age. However, this kind of account has limitations. In particular, people close to retirement and savers who expect to be in a lower tax bracket after they retire should be cautious about using this type of IRA account.

Benefits of a Roth IRA

The primary benefit of a Roth IRA is that investments can grow tax-free, and account holders don’t need to pay taxes on gains or withdrawals if they have followed certain rules.  Here are some additional benefits:

• No requirement for an annual minimum distribution
• Flexible contributions can be made up to a designated limit
• No age limit for contributions
• Earnings can grow tax-free forever
• The account can be given as an inheritance to a spouse or one or more non-spouse beneficiaries

When Not to Open a Roth IRA

Despite these benefits, the way a Roth IRA works might be disadvantageous or even unavailable for some investors.

Eligibility

For 2025, you’re allowed to contribute up to the annual limit to a Roth IRA as a single tax filer or head of household if your modified adjusted gross income (MAGI) is less than $150,000. The amount you can contribute declines depending on how high your MAGI is between $150,000 and $165,000. If your MAGI is $165,000 or more, you’re not eligible to contribute. Married joint filers can contribute up to the limit if their MAGI is less than $236,000. The partial contribution they can make declines as their MAGI rises from $236,000 to less than $246,000. They are ineligible if their MAGI is $246,000 or higher. Age does not affect your eligibility to contribute to a Roth IRA.

Ineligible Income

Money contributed to a Roth IRA needs to be already taxed at regular rates for earned income. This kind of income includes wages, salaries, commissions, tips, and so forth. Money earned through passive investments such as interest, dividends, and real-estate rental income is not eligible to be used for contributions.

Financial Considerations

Opening, funding, and maintaining a Roth IRA account can create financial and lifestyle constraints. These could include one or more of the following:

• The opportunity cost of your time and effort spent learning to invest
• The opportunity cost of time and effort in maintaining your own investments
• An inability to withdraw the money without a 10% penalty before age 59½ and before any of your Roth IRAs reaches five years of age
• Withdrawing your money at a higher tax rate than when you were employed

Some of these might not apply to your situation, but if any of them does, then you might consider an alternative to a Roth IRA.

Alternatives to a Roth IRA

There are a number of alternative account types people can use to save for retirement. Employer-sponsored plans, such as 401(k) or 403(b) accounts, are common alternatives, and for smaller companies or self-employed individuals, a simplified employee pension (SEP) IRA and a savings incentive match plan for employees (SIMPLE IRA) are available. However, the more common alternatives to a Roth IRA include traditional IRAs (which include brokerage account IRAs) and high-yield savings accounts.

Traditional IRA

Traditional IRAs allow individuals to make pre-tax contributions, which can then grow tax-deferred until withdrawal. The benefit is that it reduces taxes now as opposed to some point in the future. Investment growth in the account is tax-free. Withdrawals are taxed as ordinary income. The account mandates required minimum distributions (RMDs), generally starting at age 73.

Brokerage Account

You can open a Roth or a traditional IRA inside a brokerage account. That gives you access to a wide variety of investments and trading vehicles. You could use the same brokerage account without investing through an IRA inside it to hold the same investments. The difference is that any investment earnings would be taxable. However, you would not be forced to start making withdrawals at a certain age because the account would not be subject to RMDs. 

That also means there is no penalty for “early” withdrawal. As a result, your money would be relatively liquid. This is good for high-net-worth people who can afford to forego income from that account. The liquid holdings would be available in emergencies. In fact, you’d probably want to preserve the account by resisting the temptation to “raid the fridge” from time to time—making withdrawals for low-priority expenditures that deplete the account faster than you actually intend and thwart any goal you may have for long-term growth. Still, for those nearing retirement age with income they can afford to invest, it might be a superior alternative to a Roth IRA.

High-Yield Savings Account

If none of these alternatives seems to fit, consider the most conservative investment, a high-yield savings account. This kind of account allows savers to generate higher interest rates than normal savings accounts. It requires an initial deposit and usually also requires that the account holder maintain a specified minimum balance.

The Bottom Line

Determining whether to open a Roth IRA hinges on your tax preferences, income expectations, and financial goals. While Roth IRAs deliver unparalleled tax-free growth potential and withdrawal advantages, it is important to evaluate your circumstances and the limitations of the account to best understand whether it is the right vehicle for you.