When to Use an IRA?
An individual retirement account (IRA) is used to help you save money for retirement by deferring income taxes until the funds are withdrawn. These accounts allow you to invest in a variety of investments from stocks to bonds, and even precious metals and real estate.
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Types
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There are several types of IRAs. Some are employer-sponsored accounts; you may only invest in them through your employer. Other IRAs are not tied to an employer. These include traditional and Roth IRAs.
Benefit
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A traditional IRA is beneficial when you expect to be in the same or lower tax bracket when you retire as when you were working. This allows you to take advantage of the tax-deductible nature of the contributions to a traditional IRA. The non-taxed contributions provide more potential growth. Roth IRAs are beneficial when you believe that your future tax rates will be higher. Using a Roth allows you to pay taxes now on your contributions at a lower rate and get all of your investment gains returned to you tax-free during retirement.
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Disadvantage
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The disadvantage is the opposite of what makes each account beneficial. When tax rates rise in the future, the traditional IRA's benefits may be completely erased, leaving you with less income than if you had used the Roth. Likewise, the same or lower tax rates means that you didn't get the opportunity to invest as much as you could have. In both cases, there are restrictions on removing your money from an IRA. While a Roth allows you to remove contributions at any time, you generally cannot remove investment gains prior to age 59-1/2 without incurring a penalty. Traditional IRAs penalize withdrawals of principal contributions and investment gains prior to age 59-1/2.
Considerations
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Using an IRA is ideal when you want the tax advantages that the account offers. But, IRAs are only appropriate when you are saving money for retirement. IRAs are also only appropriate if you are comfortable investing in the types of investments offered by your IRA custodian. While IRAs may invest in a variety of instruments, there is no guarantee that the custodian you are working with offers the investments you are looking for.
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