Three Downsides Of Choosing The Traditional IRA Investment Retirement Accounts Option

23 Mar 2015 | Author: | Comments Off on Three Downsides Of Choosing The Traditional IRA Investment Retirement Accounts Option
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Three Downsides Of Choosing The Traditional IRA Investment Retirement Accounts Option

If you have already maxed out the amount of money that you can contribute to your 401K retirement plan at work, you may find yourself considering opening a separate investment retirement account in order to maximize your retirement savings potential. But with choices that can include traditional, and roth IRAs, just to name a few, you may be having a hard time determining why you should choose one investment option over the other. While a traditional IRA helps investors pay less in income taxes each year due to its use of before tax contributions, this popular investment plan is not without its downsides.

One of the biggest downsides to a Traditional IRA is that, while it protects you from taxes when you are younger, it does not exempt you from paying taxes when you go to withdraw the money later in life.

Unlike other investment options, those with a traditional IRA must pay income tax on any funds that they withdraw from the plan after they reach the minimum withdrawal age of 59 and a half. While the taxes you will have to pay on the funds may be much lower than they would have been when you were working, it is still an additional expense that many do not take into consideration when preparing for a lifestyle of living on a fixed retirement income. If you want to find out more about the best retirement options, read these gold ira investing page.

Another drawback to this type of investment retirement account is that the plan will force you to start taking withdrawals on April 1 st of the year after you have turned 70 and a half. If you have planned properly for retirement, there is a chance that you will have amassed a fairly decent sized nest egg that provides plenty of funds that will allow you to live relatively comfortably for many years before you even have to think about starting to take withdrawals from a retirement account.

With other plans, you can let the money sit and continue to earn interest, until you reach a point where you are ready to start taking money out. The Traditional IRA does not allow that and requires you to start taking minimum withdrawals; otherwise you will be charged penalties. This prevents your money from growing, and it is not a worthwhile option for investors who are looking to create an IRA that their children could inherit at some point in the future.

Lastly, a traditional IRA is subject to a 10% early distribution penalty should you find yourself in a situation where you need the funds in order to cover an unexpected expense. This type of investment retirement account, just like a 401K is designed to assist the contributor in saving for retirement, which means the funds are not designed to be easily accessible because if they were, then no one would ever be able to save for retirement. It is important to note that the IRS will wave this penalty for certain expenses, but it is best to not consider the funds in a Traditional IRA as a source of income, unless you find yourself faced with no other option.

These are just a few of the main downsides to a Traditional IRA. With a mandatory distribution start date, and income taxes that you must pay on each distribution, there are probably other retirement investment options that can better suit your retirement saving needs.

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admin on February 1st 2013

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