Benefits of Opening an IRA Account

Individual Retirement Accounts (IRAs) provide several benefits for investors, particularly pertaining to taxes. Whether you use an IRA to fund retirement, as was the government's original intention, or to satisfy higher education or first-time home buyer expenses, IRAs hold significant advantages over traditional investment accounts. The type of IRA you own often dictates which benefits you enjoy.

Types

• If you own a traditional IRA, you receive one key tax benefit on the front-end. With a Roth IRA, the IRS gives you a tax break on the back-end. The IRS allows you to deduct contributions you make to a traditional IRA, up to an annual limit, from your taxable income. When you access traditional IRA money, however, the IRS taxes it at your regular income tax rate, regardless of age. While the IRS does not allow you to deduct Roth investments, it does not tax withdrawals, even accumulated earnings, as long as you have held your Roth account for at least five years and you wait until you turn 59 and 1/2 years of age to access the proceeds or if you are taking a "qualified" early distribution, according to IRS Publication 590.

Expert Insight

• If you have a long time horizon before you need to access your investment money, an IRA makes perfect sense. In a traditional taxable account, the IRS taxes earnings, such as interest, capital gains and dividends, that accumulate in your account annually. IRA provide tax-deferred growth of earnings. You don't pay taxes on earnings until you access the money in a traditional IRA and, if you follow IRS mandates, you may not have to pay taxes on Roth IRA earnings. As such, the Motley Fool website recommends loading your IRA with stocks that pay dividends to take full advantage of this benefit.

Size

• Some investors, particularly those with limited funds, shy away from investing because they think they cannot afford to get into mutual funds, for example. While some funds have low minimum investment requirements or waive minimum if you invest on a regular basis, others do have high minimums that can exceed $1,000. As John Waggoner writes in "USA TODAY," however, many mutual fund companies allow lower minimum initial investments for IRA accounts than they do for regular accounts. If you want to buy stocks, there are firms that allow you to purchase a small number of shares, even fractional amounts, on a weekly, biweekly or monthly schedule for your IRA.

Considerations

• One potential drawback of a traditional IRA is that the IRS requires you to start taking withdrawals in the year after you turn 70 and 1/2 years old, reports Publication 590. Uncle Sam simply wants to get its hands on its share of your money prior to your passing. A major benefit of a Roth IRA is that this rule does not apply. You can hold on to Roth IRA money for as long as you like.

Warning

• You risk losing some IRA benefits if you take your money out too early. As Publication 590 warns, the IRS generally levies an additional 10-percent tax penalty on withdrawals from both Roth and traditional IRAs that you make before turning 59 and 1/2. There are exceptions to the rule. Among them -- using IRA money to pay for higher education expenses or buy, build or rebuild a first home. In both cases, you can use the money to help yourself, your spouse, your children or grandchildren.