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IRA Accounts Pros and Cons

The nearing of the retirement years is accompanied with many concerns such as the provision of money for the coverage of our basic daily necessities (e.g. food, utilities bills and etc.). Many people realize this only after retirement knocks on their door. Having in mind that nowadays even more responsibility about retirement years financing is transferred to you, failing to plan early for your retirement may turn out to be a serious mistake.

There are plenty of options you can use in order to finance your retirement. One of them is the Individual Retirement Account (also known as just IRA). This type of retirement account has some tax advantages, which have been granted to the users of such accounts by the US government in its attempt to encourage retirement saving. On the other hand, the failure to use IRA resources in their designated way can result in severe penalties.

IRA Accounts Pros

As previously mentioned, IRA accounts enjoy tax benefits. One of them is that your money increase without being disturbed by taxes. The earnings you make on the deposited money are not subject to taxes. They are invested back so that further growth is achieved.

IRA accounts have another major benefit, namely your contributions are deductible from your income that is liable to taxes. Thus, you pay fewer taxes during this year. The money is saved and kept as an asset. However, you should check the eligibility requirements that should be met in order to benefit from this feature, because not all IRA accounts has it and it is not offered to all users.

IRA Accounts Cons

As you can see IRAs have plenty of advantages. However, they have their negative sides. One of them is that you are not allowed to withdraw the accumulated money before you reach retirement. The reason for this is that this money is intended for your retirement age. The withdrawn amount before reaching retirement age is subject to 10% early withdrawal penalty. Additionally, it may be subject to tax equal to the one you pay on your income.

There are certain exceptions to the IRS's 10% penalty fee for early withdrawals. You should check to see whether you qualify for it if you need to take money out of your account before retirement age.

Another disadvantage of IRAs is that the amount you can invest in an IRA account is not limitless. The reason for this is that you will deprive Uncle Sam from his due in terms of income taxes. Thus, a certain limit on the amount you can contribute each month is set and you cannot exceed this amount. The IRS establishes these contribution limits every year, so you should check them from time to time.

IRA Alternatives

There are plenty of investment options within an IRA account, despite the commonly held misconception that CD's are the only alternative. These other options come at a different risk/reward level.

Thus, if you are not risk averse and willing to be exposed to higher levels, you can give mutual funds or stocks a try. This is especially true for people that are far away from their retirement and can afford losing some money and making it up afterwards.

On the other hand, a deep knowledge on the basics of mutual funds and stocks is needed if you select the investment in them within your IRA account. You should evaluate whether you are willing and able to lose some money, because this possibility exists with these types of investments.

Use the services of a professional advisor if you don't feel comfortable with your knowledge and skills.

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