Some of them may look good on papers but in practice, it may not bring dividends to the retired people. Some other investment plans are exempted from tax at the time of investments, but on maturity, people were forced to pay heavy amounts as taxes. This paper analyses benefits and drawbacks of various retirement options available in the United States at present like the IRA, Roth IRA, SEP IRA, 401k and Roth 401k etc.
IRA refers to Individual Retirement Accounts whereas Roth IRA (named after its legislative sponsor William Roth) refers to an Individual Retirement Arrangement (IRA) allowed under the tax law of the United States.
Kennon (2010) has mentioned some of the major advantages and disadvantages of IRA’s and Roth IRA’s. In his opinion IRA’s are attractive because; IRA taxes are paid only on earnings, it is available to everyone without any income restrictions, funds can be used to purchase a variety of investments like stocks, bonds, certificates of deposits etc (Kennon). Some of the retirement investment options available in America at present are constrained to ordinary people because of the income restrictions. For example, Roth IRA schemes are available only to a particular community who earns more. The investor in IRA’s need does not worry much about the taxes as the tax is calculated based on the earnings rather than the principal amount. For example, it is possible that an investor in an IRA scheme may gain or lose heavy amounts because of the fluctuations in the stock market. Only the persons who gain something from their investments need to pay taxes whereas the losers need not pay anything as taxes in case of IRA’s.
The major drawbacks of IRA’s are related to the withdrawal rules according to Kennon (2010). Investments in IRA’s cannot be continued by an investor when he crosses the age of 70.5 years. Moreover, an investor needs to pay 10% penalty if the funds were withdrawn before the age of 59.5 years (Kennon).