Why a Roth IRA Is a Bad Idea (Yes, You Can Lose Money)

Before we get too far ahead of ourselves, let’s quickly define the Traditional IRA and the Roth IRA.

The traditional IRA started in 1974. It’s a great way for people to invest in their retirement with before-tax dollars and defer those taxes until they withdraw the funds in retirement.

The Roth IRA was introduced in 1998 and flipped the script on the traditional Roth rules. Instead of deferring taxes until retirement, with a Roth IRA you’d pay the taxes before investing—and then never pay them again, even at the time of withdrawal.

Everyone thinks they should contribute to a Roth IRA, but that’s true for only a handful of people.

So who is that handful?

Who would benefit from putting their money into a Roth IRA?

For the 9% of people in our survey that would benefit from a Roth IRA—

• 77% were 33 or younger.

• 68% contributed more than $5,000 a year.

• 93% expected to withdraw $100,000 a year or more in retirement (in today’s dollars).

So if you’re early in your earning years, contribute heavily into retirement, and plan to withdraw far more in retirement each year than you earn today—you should likely contribute to a Roth IRA.

If not (and most of us are in this camp)—you’re better off investing in a traditional IRA and deferring your taxes until retirement.

We already dropped this truth bomb on you, but it’s worth repeating:

• 92% of people believed they should invest in a Roth IRA.

• Only 9% of the survey respondents would actually benefit from a Roth IRA investment.

And remember I told you the story gets even worse?

That 9% result is inflated.

These respondents’ answers triggered a Roth result because they plan to withdraw huge amounts of money in retirement, which is completely unrealistic given their retirement account balance.

In reality, only 1 of the 635 surveyed individuals would benefit from a Roth investment and have their savings last for more than ten years.

So is the Roth IRA worth it?

Based on our survey results, we estimate that the Roth IRA is worth it for 0.2% of the population.

Most Americans think they should invest in a Roth IRA (and so did I).

Why?

Because everything about it just seems to make sense—

• Get tax-free growth on your money.

• Avoid paying taxes in retirement.

• Pay taxes now to avoid the higher tax rates of the future.

And on top of that, it seems like every money guru and investment professional touts the many benefits of the Roth.

All signs indicate the Roth is a wise move—but 99% of the time, it’s not.

First off, let’s dispel the myth of tax-free growth.

No matter what anyone says, whether you pay taxes now or in the future doesn’t matter.

If you pay 10% in taxes today, invest the rest, and withdraw it tax-free in retirement, you’ll end up with the same amount than if you invested the full amount and paid the 10% tax in retirement.

That’s just math.

So don’t worry about tax-free growth. It truly doesn’t matter and doesn’t play into this conversation.

Now back to the task at hand.

What are the disadvantages of a Roth IRA?

What makes it such a lousy investment when everyone under the sun thinks it’s so great?

To contribute to a Roth, you need to pay the taxes of your upper tax bracket.

In retirement, you’re saving money on the average taxes you pay.

So let’s say you’re in the 22% tax bracket. If you earn $122,000/year now and make the same amount in retirement, you’re effectively paying 22% tax today to invest in the Roth to save 9.8% in retirement.

This is obviously a bad move that no one should sign up for.

Don’t believe it? A recent retirement study found that retirees pay an average of just 5.7% in federal taxes.

I mentioned early in this post that investing in a Roth cost me nearly $400,000.

That sounds unreal—perhaps even impossible.

But what about the surveyed individuals?

What if they invested in a Roth instead of a traditional IRA? How much would they lose on average?

For those that had proper withdrawals to make their investment last 20 years or more, all would lose money by investing in a Roth IRA.

• If they invested in a Roth, the average respondent would earn $1,340,512.

• If they invested in a traditional IRA, the average respondent would earn far more—$1,503,865 over the course of their retirement.

So, on average, by investing in a Roth IRA, retirees lose out on $163,000 vs. those who invested in a traditional IRA.

According to the Investment Company Institute, 26.3 million households invest in a Roth IRA.

If each of these households experienced the same loss as our survey respondents, how much money might America be currently leaving on the table in their retirement accounts?

26,300,000 Roth IRA accounts x $163,000 left on the table = Total $ lost in retirement

The answer?

$4.29 trillion.

Yikes.

Over the course of our American lives, we’re likely paying $4.29 trillion too much in taxes—and we’re paying it early in life.

All because we’re choosing the wrong investment account for our retirement.

We surveyed 635 individuals and asked them over a dozen questions, including:

• Do you invest in a Roth or Traditional 401k (or other)?

• Do you think you should invest in a Roth?

• Current annual income.

• Annual retirement contributions.

• Current retirement balance.

• Expected retirement age.

• Expected annual withdrawal in retirement.

We received responses from 167 Gen Zers, 288 millennials, 94 Gen Xers, and 86 boomers. Of the 635 respondents, 370 were men, 264 were women, and one declined to answer.

We ran the responses through our Roth 401k calculator to see how much each individual would earn over their lifetime with a traditional 401k vs. a Roth 401k. With these numbers, we could identify who should and should not be investing in a Roth IRA.