Risks of a Roth IRA & a Roth TSA

Roth individual retirement accounts and Roth tax-sheltered annuities, also known as Roth 403(b) plans, let you save money on an after-tax basis. This means you won't get a deduction for contributions, but retirement distributions will be tax-free. However, as tempting as tax-free future income sounds, these plans aren't without a few risks.

Lower Tax Bracket

The main advantage of using a Roth retirement plan rather than a traditional account is that you won't pay taxes on your qualified distributions. However, that also means you give up the deduction for making contributions. So, if you fall in a lower income tax bracket at retirement, the tax break for contributing would be a better option. For example, say you're in the 35 percent tax bracket this year and you contribute to a Roth IRA. If you're only in the 25 percent tax bracket at retirement, you're giving up a deduction at 35 percent to get a tax break when you're only paying 25 percent.

Five-Year Waiting Period

With traditional retirement plans, once you turn 59 1/2 years old, your withdrawals count as qualified distributions. But, both Roth IRAs and Roth TSAs tack on an additional requirement: at least five years must pass between January 1 of the year you make your first contribution and when you take the distribution. So, even if you're already 59 1/2, if you're just opening a Roth account you must wait five years before you can take qualified distributions.

Early Withdrawal Penalties

If you take non-qualified withdrawals from your Roth TSA, your distribution is prorated between contributions and earnings -- for example, if your account consists of 90 percent contributions and 10 percent earnings, so will your distribution -- and the earnings portion is hit with income taxes and a 10 percent early withdrawal penalty. This isn't as big of a deal with Roth IRAs because you can take out your contributions at any time without touching your earnings. So, as long as you don't take out more than the contributions in the account, you won't incur any taxes or penalties.

Limited Access

Another risk of a Roth TSA is that you might not be able to take distributions if you really need the money. If you're under 59 1/2 years old and still working for the organization, you can't take your money out unless you have a financial hardship -- and even then, only if your TSA plan allows hardship distributions. With a Roth IRA, there are no limits on your early withdrawals, even though you might owe early withdrawal penalties.

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