An IRA (defined in “What Is an IRA”) has many benefits, when you can put as much money into the plan as possible without going into debt to support yourself at your current income level. Even if you can’t put additional money in every single year, it is a wonderful way to put money aside in an account that will grow over time, for your retirement, without being taxed until it is removed. Some IRAs can also even help you with tax deductions.

There are a few different options outlined below to give you a general overview, but you should also talk to an investment manager to help you figure out which one is best for you.

  • Traditional IRA: This was the original IRA. You can put up to $3,000/year (until 2004, following that the maximum will gradually increase) into the account. You can start taking it out at age 59½ and must start taking it out by age 70½. If you take it out earlier, you will be penalized 10% of the total that you have taken out. If you make over $43,000 alone or $63,000 jointly, you cannot contribute to this IRA.

    BENEFIT: If you are not covered by a retirement plan by your employer, contributions are fully deductible.

  • Roth IRA: The same amount can be contributed per year as a traditional IRA ($3,000 until 2004). If you earn over the maximum amount allowed with the Traditional IRA, you can still contribute up to a certain point ($110,000 single, $150,000 joint), but the amount that you can contribute is decreased.

    BENEFITS: You can add money at any age (even after 70½) and can take out qualified distributions (disability, purchase of first home) early, tax-free. Contributions are pre-taxed (as they come out of your paycheck, for example) and cannot be deducted. However, when you take out the money after retirement, it is tax-free.

  • Education IRA: This was created for families who struggle with the enormous (and increasing) costs of college tuition. While the maximum contribution per year is lower, the benefits are higher assuming your child attends college. If this is not the case, you are penalized when the money is removed.

    BENEFIT: As long as you earn less than $100,000/year, you can put up to $500 into this IRA and not be taxed at all - not even when you take it out – assuming it is used for your children’s education only.

While all of these accounts have their benefits, they are designed for different people under different circumstances. If, for example, you have chosen to invest but you need as much money now as you can, the Traditional IRA would be the best option as it is tax-deductible. If you are comfortable financially while contributing the maximum per year ($3000 until 2004 for Traditional and Roth), the Roth is a smart decision because although it isn’t tax-deductible, it does allow you to take the money out tax-free upon retirement. Whichever you decide, it is a pretty safe way to invest your money for retirement.