IRA Problems
A IRA is an individual retirement arrangement. These accounts are designed to defer taxes on savings inside the account until retirement. Once you retire, you can draw on the IRA for income. IRAs can invest in a variety of investment products to grow your retirement nest egg. With all of the benefit of IRAs, however, there are still some drawbacks that you need to be aware of.
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Types
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There are two types of IRAs: traditional and Roth. Traditional IRAs allow tax-deferred contributions to the plan. Roth IRAs allow after-tax contributions into the plan. Ordinary income taxes are due on withdrawals from a traditional IRA while withdrawals from a Roth IRA are tax free. Each IRA also has its own contribution limits which may change from year to year (normally, adjusted upward).
Contributions Limits
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A problem with IRAs is that, regardless of which IRA you choose, there are contribution limits. Contribution limits inherently discourage savings by placing a cap on the amount of money you can save. If you exceed the limit, a penalty is assessed.
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Changing Laws
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IRAs are subject to government control. Contribution limits can be changed, investment option allowances can be changed, and various rules and regulations can be altered to allow or bar access to IRA plans in the future to favor one section of the population over another (e.g. favor middle class and lower income individuals over higher income individuals, as is the case with Roth IRAs). Additionally, changing tax laws could erase the benefits of a Roth IRA or could make withdrawing money from a traditional IRA a losing proposition.
Limited Withdrawals
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IRAs tend not to be very liquid accounts prior to retirement. Roth IRAs do allow more flexibility in terms of withdrawals because you can withdraw your contribution amount. But, withdrawals of interest payments cannot be done without incurring a penalty. Penalties are incurred (as of 2010) if you make withdrawals prior to age 59 1/2 and if you do not start withdrawing money after age 70 1/2.
Considerations
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Before investing in an IRA, make sure that you are looking for a long-term savings strategy. If you envision needing your savings prior to 59 1/2, an IRA may not be a good option for you. You also need to keep in mind that which IRA you choose (Roth vs. traditional) depends entirely on future tax rates. Since future tax rates are unknown, you won't know which IRA will be the best for your situation 10, 20, or even 30 years from now.
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References
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