The IRA, or Individual Retirement Account, is one of the most common and easiest retirement accounts to set up and allows you to receive a number of tax benefits not enjoyed by other types of retirement accounts. Both self-employed persons and those with a traditional job can open and contribute to IRAs as long as they are under 70 years of age.
Pro: Tax Benefits
The major advantage of owning an IRA is that the money isn't taxable until you withdraw it at retirement. This means your money will accrue tax-free, giving you more money in the long run with pre-tax dollars. Your earnings are invested tax-free back into the accounts and markets. What's even better, the money you put in your IRA can be deducted from your income when it comes time to file taxes. According to FinancialPlanningAdvice.com, there are restrictions in place, so it's important that you check with a financial advisor or local bank to make sure you qualify for these benefits.
Pro: Investment Options
Within the IRA, you can direct your money to be invested in CDs (the safe option) or you can take a risk and put the money into stocks or mutual funds. These last two choices are better for those who are younger and can afford to play the investment game for some time. Even if they lose some money, chances are they will eventually get it back in the future from different investments.
Negative: Contribution Limits
The government limits how much money you can put into the account. These numbers vary from year to year, but the important thing to know is that they're usually not that high. If you have a Roth IRA, then you can ask your company if they offer an employer-sponsored retirement program that matches your contributions. However, standard IRA accounts don't offer this benefit. What's more, the amount you can contribute every year goes down as your income goes up. The more you earn, the less you are allowed to contribute.
Negative: Withdrawal Conditions
Money deposited in an IRA is not meant to be used before you retire. To ensure the money remains untouched, there are several penalties involved when it comes to early withdrawal. The main one is that you might be charged up to a 10 percent withdrawal penalty. This is in addition to also being charged taxes on any money you withdraw.
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