Advantages & Disadvantages of Different IRAs

by Wilhelm Schnotz

There are a few different types of individual retirement accounts (IRA) that can help you save for retirement. Although each type features its own regulations, the Internal Revenue Service's basic guidelines for IRAs are universal: You can't contribute more than $5,000 a year at time, you can't access funds in an IRA before you reach age 59 1/2 without triggering a 10-percent excise tax penalty, and you must begin receiving distributions when you reach age 70 1/2.

Traditional IRAs

You can claim contributions made to traditional IRAs as tax deductions, which offers you a pair of advantages. Contributions lower your taxable income -- and therefore tax bill -- for the year in which they're made. Because contributions aren't taxed, you're able to place a larger portion of your income into investments. However, you only defer income taxes as the IRS requires you to pay income tax on distributions when you access the funds. Funds in traditional IRAs may also be rolled over into most other types of retirement accounts.

Roth IRAs

Contributions to Roth IRAs aren't tax deductible, so they don't reduce your adjusted gross income. A post-tax maximum annual investment of $5,000 is a larger proportion of your earnings than the same amount contributed to a traditional IRA. Contributions to a Roth IRA don't offer immediate tax advantages, but the IRS allows distributions from Roth IRAs to be made tax free. Unlike traditional IRAs, the IRS doesn't force you to begin receiving distributions when you turn 70 1/2, and you may leave funds in a Roth IRA as long as you wish. Investors with an adjusted gross income of $122,000 if filing singly, or $179,000 if married and filing jointly, are not allowed to invest in Roth IRAs. Funds placed in a Roth IRA can't be rolled over into other types of retirement accounts.

Simple IRAs

SIMPLE IRAs allow small employers to offer pretax retirement plans to their employees that offer matching contributions from the employer. These plans are easy to administer, and employees may select financial products that fit their retirement goals. The IRS handles distributions from SIMPLE IRAs the same as traditional IRAs. Investments in SIMPL E IRAs are also flexible as the IRS allows you to roll over funds to most types of retirement accounts two years after they're deposited.

401ks and More

Although they're not technically individual retirement arrangements, employer-sponsored plans such as 401k and 403b plans also offer many advantages. If made with pretax contributions, distributions and deductions function largely like traditional IRAs, and post-tax 401k plans known as Roth 401ks are also available. These offer deduction and distribution rules similar to those of a Roth IRA.

About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

Photo Credits