IRAs have low annual contribution limits. One drawback to using IRAs to save for retirement is that the annual contribution limits are relatively low. Both the traditional individual retirement account (IRA) and the Roth IRA offer key tax advantages. A traditional IRA allows you to deduct all or part of your contributions, depending on your level of income, and your balance increases with deferred taxes.
With a Roth IRA, you invest the money after taxes, but you can withdraw money tax-free if you're at least 59 and a half years old and have owned the account for at least five years. Plus, compared to workplace plans, you have access to more investment options. In the case of traditional IRAs, the distributions you make will be taxed according to your income tax rate at the time the withdrawal takes place. If distributions are made before age 59 and a half, a federal tax penalty of 10% applies.
However, in certain situations, you may be allowed to make early withdrawals from an IRA without a 10% penalty. Expenses that may exempt you from the penalty include, but are not limited to, buying a home for the first time, medical bills and higher education payments. The main disadvantage of a conventional IRA is the ability to apply early withdrawal penalties. If you make a distribution before your 59th birthday, you'll have to pay an additional 10% tax penalty, unless you qualify for an early withdrawal exception.
Nor will you have to worry about early withdrawal penalties or other taxes. You can then use your account the same way you would if you started with a Roth IRA. Of course, you'll want to look at some of the factors that influence the use of these accounts. Consider the amount of your taxes if you withdraw the funds and transfer them.
What is a Roth IRA? Beyond being a special type of retirement savings magic, it's a type of personal retirement plan that provides you with multiple tax benefits, such as tax-free growth and tax-free distributions during retirement.