It depends on your expected income and tax rates Part of the Series Roth IRAs: Investing and Trading Dos and Donts.
With a Roth IRA, people can invest their pre-tax retirement savings without having to worry about taxes on the gains or having to take required minimum distributions when they reach the normal 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.
Looking for a Roth IRA but not sure if it’s right for you? You’re not the only one! It can be hard to figure out which retirement account is best for you, especially when you have to choose between traditional and Roth options. I’ve spent a lot of time researching this subject to give you the clearest answer to your burning question: who should actually put money into a Roth IRA?
The Roth IRA vs. Traditional IRA Showdown: Understanding the Basics
Before diving into WHO should choose a Roth, let’s make sure we understand WHAT we’re talking about.
A traditional IRA lets you contribute money before paying taxes on it (pre-tax contributions). This reduces your taxable income now, giving you an immediate tax break. However, when retirement comes and you start withdrawing money, you’ll pay taxes on every dollar you take out.
On the other hand, you put money into a Roth IRA that you have already paid taxes on. You won’t see a tax break right now, but if you’re at least 59º years old and have had the account for at least five years, you can take out qualified withdrawals tax-free in retirement.
For 2025 the maximum contribution limit across all your IRAs (traditional or Roth) is $7000, or $8,000 if you’re 50 or older.
5 Types of People Who Should DEFINITELY Invest in a Roth IRA
1. Young Professionals in Lower Tax Brackets
If you’re early in your career and not making big bucks yet, a Roth IRA is practically screaming your name! Since you’re probably in a lower tax bracket now than you will be later in your career, it makes sense to pay taxes now at a lower rate.
Take this example: If you’re earning $50,000 and fall into the 12% tax bracket as a single filer, you’re just a few promotions away from jumping to the 22% bracket. Why not pay taxes at 12% now rather than 22% or higher later?
2. People Expecting Higher Tax Rates in Retirement
This isn’t just about your personal income trajectory. If you believe federal tax rates might increase in the future (which let’s be real is a possibility given current economic trends), then paying taxes now at today’s rates could be a smart move.
Keep in mind that the lower federal tax rates that are in place now will go back to the levels they were in 2018 after 2025. This makes Roth contributions potentially more attractive today.
3. Super Savers Who Can Max Out Contributions
If you’re one of those awesome financial wizards who can afford to contribute the maximum amount to your retirement plan without flinching, the Roth option effectively lets you save MORE in a tax-advantaged manner.
How? Well, think about it this way: $7,000 in a Roth IRA is worth more than $7,000 in a traditional IRA because the Roth money is already taxed. When you withdraw from the traditional IRA, you’ll lose some to taxes, but the entire Roth withdrawal stays in your pocket!
4. People Worried About Required Minimum Distributions (RMDs)
If you have a lot of money saved up in traditional retirement accounts and are getting close to retirement, you may be worried about RMDs. You have to start taking RMDs from your traditional IRA when you turn 73, even if you don’t need the money.
These forced withdrawals could bump you into a higher tax bracket. But guess what? Roth IRAs don’t have RMDs! This means you can let that money grow tax-free for as long as you want and withdraw only when you need it.
5. Those Who Want to Leave a Tax-Free Legacy
If leaving money to your heirs is important to you, Roth IRAs are generally better for inheritance purposes. Your heirs can continue to enjoy tax-free growth and withdrawals from the inherited Roth IRA, which is a pretty sweet gift to leave behind!
2 Types of People Who Should Probably Skip the Roth IRA
1. Peak Earners Who Expect Lower Retirement Income
If you’re currently in your highest-earning years and expect to have less income in retirement, a traditional IRA might make more sense. For example, if your household income is $360,000 and you’re in the 32% tax bracket now, but expect to drop to the 24% bracket in retirement, why pay the higher tax rate now?
By using a traditional IRA, you’ll reduce your current taxable income while paying at a higher rate, and then make withdrawals at a potentially lower tax rate later in retirement.
2. Cash-Strapped Individuals Who Need Every Dollar Now
If you’re struggling to make ends meet but still want to save for retirement (good for you!), the pretax approach of a traditional IRA or 401(k) may make more sense. The tax deduction now means more money in your pocket today, which might be crucial for your current budget.
For instance, if you earn $30,000 and contribute 6% to get your company’s full 401(k) match, the pretax approach provides you with more net pay right now – around $216 per year more in this example.
Best Investments for Your Roth IRA in 2025
Once you’ve decided a Roth IRA is right for you, the next question is: what should you put IN it? Since your Roth investments grow tax-free forever, you’ll want to maximize this benefit by choosing investments with the greatest growth potential or those that would otherwise generate a lot of taxable income.
Here are some great options:
1. Dividend Stocks and Dividend Funds
Dividend stocks pay you regular income that would normally be taxed at your ordinary income rate (up to 37%!). Holding these in a Roth shields all that dividend income from taxes.
2. Growth Funds
These funds focus on stocks with high growth potential. While they might be more volatile, they can deliver substantial returns over time – returns that will never be taxed if held in your Roth IRA.
3. S&P 500 Funds
These index funds track the performance of the 500 largest publicly traded U.S. companies and have generated annualized average returns of about 10% since 1957. Not too shabby for a tax-free investment!
4. REITs (Real Estate Investment Trusts)
REITs must pay out at least 90% of their taxable income to shareholders, which means they can generate significant taxable distributions. Keeping them in a Roth IRA protects you from this tax burden.
5. High-Yield Bond Funds
These “junk bond” funds typically offer higher returns but come with more risk. Their high dividend yields make them perfect candidates for the tax shelter of a Roth IRA.
Still Not Sure? The Tie Goes to the Roth!
If you’re still on the fence after considering all these factors, financial experts often suggest defaulting to the Roth. Why? Three big reasons:
- Better for heirs – As mentioned, Roth accounts are generally better for inheritance purposes.
- Tax diversification – Having both traditional and Roth accounts gives you flexibility in retirement and hedges against future tax law changes.
- Access to contributions – You can withdraw your Roth IRA contributions (but not earnings) at any time without taxes or penalties if you need to.
My Personal Take
I’ve been investing in a Roth IRA for several years now, and I gotta say, the peace of mind knowing my money is growing tax-free is worth its weight in gold. Sure, I don’t get the immediate tax break like I would with a traditional IRA, but I’m playing the long game here.
For me, the decision came down to this simple thought: do I want to deal with taxes now or later? And honestly, I’d rather get it over with now while I know what the tax rates are rather than gamble on what they might be 30+ years from now when I retire.
The Bottom Line
Choosing between a traditional and Roth IRA ultimately comes down to when you want to pay your taxes – now or later. While no one has a crystal ball to predict future tax rates or your future income, the guidelines above should help point you in the right direction.
Remember that you don’t have to choose just one type of account. Many financial advisors recommend having both traditional and Roth accounts to give yourself flexibility in retirement.
The most important thing is that you’re saving for retirement in the first place. So pat yourself on the back for thinking about this important decision, and keep up the good work!
Have you already decided between a traditional and Roth IRA? What factors influenced your choice? I’d love to hear about your experience in the comments below!
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. Most people, though, choose traditional IRAs (like brokerage account IRAs) and high-yield savings accounts instead of a Roth IRA.
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.
Roth IRA Explained Simply for Beginners
FAQ
Who should invest in Roth?
For people who expect income in retirement to be as high or higher than their current level, others who expect their tax rate in retirement to be higher than today, or younger people who expect steady income growth over their careers, Roth IRA contributions may be the better choice.
Who should not invest in a Roth IRA?
Key TakeawaysPeople close to retirement and savers who expect to be in a higher tax bracket after they retire tend to benefit more from a traditional IRA. Roth IRAs might not be the best choice for investors who want to make tax-deductible contributions in the year they make them instead of taking tax-free withdrawals years later.
At what age is Roth not worth it?
If your age is greater than 50, it likely doesn’t make sense to convert because there is not enough time to allow the Roth IRA growth to exceed the tax cost today.
Is there a downside to a Roth IRA?
What are the best investments to hold in a Roth IRA?
Which investments are best to keep in your Roth IRA? Those that will grow the most tax-free over many years. Investments you expect to grow substantially over time or pay significant dividends are best placed in your Roth IRA.
Are Roth IRAs investments?
Let’s start by clarifying a common misconception: Roth IRAs are not investments. Instead, it’s an investment vehicle or account that allows you to hold investments within it. Think of the Roth IRA as a car that drives you toward “Tax-Free Land. ” Your investments will be your passengers — stocks, bonds, ETFs, and more. Your goal?.
Should you invest in a Roth IRA or a mutual fund?
While these are “safe,” they don’t take advantage of Roth IRAs’ tax-free growth. On the other hand, an online broker like Fidelity Investments or M1 Finance offers various investments, including stocks, ETFs, and mutual funds. This is the place to go if you’re looking to invest in long-term, high-growth companies.
What investments should not be kept in a Roth IRA?
You should avoid keeping investments that are extremely conservative or extremely risky in your Roth IRA. Cash, certificates of deposit and tax-free municipal bonds can be an important part of your portfolio, but they should not be kept in your Roth IRA.
Should you invest in a Roth IRA or a taxable account?
Investing in something that is tax-free is almost always better than investing in something that is taxed. Roth IRAs also offer investors a lot of flexibility, experts say. Guay says that one great thing about the Roth is that you can take out any money you’ve put into it at any time without having to pay taxes or penalties.
Where should I invest my Roth IRA?
S&P 500 index funds One of the best places to begin investing your Roth IRA is with a fund based on the Standard & Poor’s 500 Index. It’s a collection of hundreds of America’s top companies, including many of the names you know and use every day (Amazon, Apple and Microsoft, for example).