Considering opening a retirement account? Thinking about moving from one form of retirement account to another? The benefits of retirement accounts may outweigh the potential costs or restrictions. These accounts are flexible, easy to establish and contribute to and may save you a lot of money over the long run. Let's start with the top advantages and disadvantages.

Asset Protection

Retirement accounts offer some tax and asset protection benefits to investors saving for retirement. While the rules vary from account type to account type, investors who use a retirement account like an IRA may be able to avoid, or delay, many of the taxes they would pay on gains in a taxable investment account and, in some cases, may be able to defer taxes on money contributed to a retirement account.

It is also worth noting that retirement accounts like IRAs can offer a degree of asset protection in the case of lawsuits, collection processes and even bankruptcy. There are conditions that must be met for those protections to take effect, but it is an additional benefit that could help offset some of the risk of the big unknowns in your financial future.

Liquidity Risk

The benefits of retirement accounts like IRAs come with costs and restrictions as well that you should consider. The most significant of these costs is a lack of liquidity. Although you have a lot of flexibility about where your money is invested within a retirement account, you can't access those assets before retirement age without significant penalties.

If you have planned appropriately, the lack of access to your assets within a retirement account shouldn't be a problem, but it is something to consider. As you get older, there are other rules and restrictions to consider. Some retirement accounts, for example, force withdrawals at certain ages. It is difficult to predict whether this will be to your advantage when you are at that age.

So just what is a retirement account? Here are examples of the two most popular forms of self-directed brokerage retirement accounts that investors use.

The Individual Retirement Account (IRA)

A traditional IRA (individual retirement account), as the name suggests, is a retirement account for individuals that allows you to boost your retirement savings by investing pre-tax dollars.

Many individual investors don't have access to an employer-sponsored retirement plan, like a 401(k). However, these individuals may want to be planning and saving for retirement anyway. And since Congress didn't want to play favorites with only those investors who work for companies that offer retirement plans, it created IRAs. An IRA offers most of the perks and benefits you will find in a 401(k) plan, but it gives you the ability to manage your investments on your own.

Traditional IRA Basics

Traditional IRAs are defined by a few basic features. Once you understand these basic concepts, the rest is just details. Here are the important points you need to remember:

• You don't pay taxes on the money you put into your traditional IRA
• Your investments grow tax-deferred inside your traditional IRA
• You pay taxes when you take your money out of your traditional IRA at retirement

What this means is that if you think you will be in a smaller tax bracket when you retire than you are now when you are working, then a traditional IRA could be a real money-saver. However, there is a very popular alternative to the traditional IRA.

Roth IRAs

A Roth IRA is similar to a traditional IRA, but with one major difference - with a Roth IRA, you pay taxes as your money is going in to and not as it is coming out of your account.

Roth IRAs were created in 1998 by a bill that was introduced by Senator William Roth of Delaware - hence the name "Roth" IRA. Congress created Roth IRAs to provide individuals with more tax incentives to save for retirement. For instance, if you believe you are going to be in a higher tax bracket when you retire than you are in now, a Roth IRA makes perfect sense because you are taxed on the money you put into a Roth IRA now, not on the money you take out later.

Roth IRA Basics

Roth IRAs are defined by a few basic features. Here are the important points you need to remember:

• You pay taxes on the money you put into your Roth IRA
• Your investments grow tax-deferred inside your Roth IRA
• You take your money out of your Roth IRA tax-free at retirement

Weighing the Pros and Cons of Traditional IRAs vs. Roth IRAs

While the most popular retirement accounts -- traditional IRAs and Roth IRAs -- may have a few differences, they are actually quite similar.

However, each account does have distinct advantages and disadvantages.

Take a look at the pros and the cons listed below to get an idea of the strengths and weaknesses of each account type:

Traditional IRA

Pros:

• Pre-tax contributions
• Money grows tax-deferred
• No management fees at Scottrade
• Invest in virtually any asset
• Contributions may be tax-deductible

Cons:

• Taxable withdrawals
• 10% penalty on early withdrawals
• Mandatory withdrawals begin at age 70 1/2

Roth IRA

Pros:

• Tax-free withdrawals
• Money grows tax-deferred
• No management fees at Scottrade
• Invest in virtually any asset
• No mandatory withdrawals

Cons:

• Contributions made after taxes
• 10% penalty on early withdrawals
• Contributions are not tax-deductible

Here are a few things to consider when evaluating these different plans:

• If you have an employer that offers to match your investments, consider contributing enough to a 401(k) to get your employer match.
• If you are in a lower tax bracket now and expect to be in a higher bracket when you retire, consider a Roth IRA over a traditional IRA.
• If you are worried about taxes rising in the future, consider a Roth IRA over a traditional IRA.

Overall, you should carefully consider your retirement objectives, expectations and short-term financial needs as you evaluate retirement accounts. Keep in mind, one account may be right for you, or you may choose to have multiple retirement accounts depending on your needs. And, this year in particular, you can always change your mind and convert a traditional plan to a Roth plan. For more details about the IRS's new conversion rules, visit the KnowHow News archives.

If you take the time to really evaluate the features of retirement accounts, you will likely settle on a solution that serves you well in retirement.

John Jagerson contributes educational videos and articles about the stock, options and forex markets that can be seen daily at www.learningmarkets.com. This article was written exclusively for Scottrade.

Scottrade does not provide tax advice and the information contained in this article is not meant as a replacement for professional advice. Some of the information could vary depending on State law and your individual situation. Please consult your tax, or legal, advisor for questions concerning your personal tax or financial situation.