Disadvantages

The first problem is actually the benefit you get using a Traditional IRA. You will pay taxes when you finally do withdraw from your Traditional IRA. The amount withdrawn is added to your aggregate income for the year when it happens. So if you earn $50,000 and withdraw $10,000 that year, then you will have to pay income taxes on $60,000 for that same year. Depending how much is withdrawn and when, it can mean the difference between being taxed in one tax bracket or another. Remember, the IRS tax code is graduated, so the more income earned in a year, the more taxes paid.

For most it makes no difference but the individual assets held in a Traditional IRA can be treated worse. Again, when you take the money out, you are taxed at an income tax rate. That can be higher than what you would pay if you owned the asset and sold it under a taxable account. This is especially apparent with stock dividends and similar. Again, the amount can be a difference of pennies for most, but for some who have quite a bit of money in their Traditional IRA in stocks it can mean significant dollar differences after taxes.

Again, the Traditional IRA is for pre-tax money. In comparison, a Roth account can take in post-tax money and allow it to grow tax free. When it’s withdrawn, no additional taxes occur either. This difference puts the Roth account ahead of the Traditional IRA.

And the Traditional IRA does you no favors in later age. The rules of the account specifically require you to start taking your money out at 70½ years of age, no exceptions. Don’t follow the rules, and you could find yourself losing half of the minimum required withdrawal amount going to the IRS as a penalty. A Roth account has no such limit, and you can leave your money in all the way into death (thereby leaving it for your estate).

Finally, if you find yourself in a bind before you get to retirement, there’s a painful cost to pay for taking your money out early. Withdrawals before age 59½ will cost you a 10% penalty for early distribution. The few instances were this penalty is waived include the following:

• Annuity payments
• Health insurance
• Paying the IRS for some other tax penalty or levy
• Unreimbursed medical expenses (verified)
• Death or disability
• First time homebuying
• Higher education expenses (verified)

And even these categories have their limitations and criteria that must be met successfully. If not, you lose the 10%.