Individual retirement accounts (IRAs) are a common investment option that help you build toward financial stability in your retirement years. They are strongly recommended by financial planners, many of whom suggest opening an IRA as early in your life as possible to start earning interest. There are a lot of benefits to retirement accounts, and while the disadvantages shouldn't be enough to dissuade you from using them, you should understand the give-and-take of a retirement account before putting your money in one.
No Short-Term Benefits
Investors shouldn't expect any short-term benefits from a retirement account. In fact, many financial planners suggest that money shouldn't be invested into a retirement account if the investor plans on withdrawing it within five years. You may be able to earn some modest interest in a five-year period to make the investment worthwhile if you are putting the money toward a down-payment on a house, but in other instances, the fees and penalties associated with a retirement account can lead to a very marginal short-term gain, if not a loss.
Penalties
The money you put into retirement accounts usually isn't retrievable without paying taxes and, in some cases, a penalty. This means the interest you earn at age 23 won't be accessible to you until you are 59 1/2 years old, unless you want to pay a 10 percent penalty. For this reason, it's recommended that you have an ample supply of backup funds outside of your retirement account to avoid getting hit with this costly penalty.
Investment Limits
There are contribution limits on both employer-sponsored retirement plans and IRAs. As of 2009, those under 50 can contribute only $5,000 annually to an IRA. The contribution limit for a traditional 401k plan is $16,500, although those older than 50 can contribute an additional $5,500. If you have the financial wherewithal to save more than that, you will have to find another vehicle.
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