There are several different types of IRAs: Traditional IRA, Roth IRA, Education IRA (EDIRA), now called Education Savings Accounts, SEP-IRA, SARSEP-IRA, and SIMPLE-IRA. Traditional IRAs are broken down into Regular, and Rollover IRAs. The best part about an IRA is that your investments grow tax-free until you take the money out at retirement.         to the top

A Roth IRA is a tax-deferred retirement account that turns the traditional IRA formula on its head: although retirement contributions are taxed up front, withdrawals can be made completely tax-free once you reach age 59 1/2 and have had a Roth IRA for five years. For some people, paying taxes now to enjoy tax-free income later may actually make more financial sense in the long term. For one thing, the Roth IRA allows investors to effectively shelter more money for retirement. Although the annual contribution limit is the same for both traditional and Roth IRAs, because your Roth contribution is made with after-tax income, the full $4,000 (or $5,000 if you're age 50 or older) can compound substantially over the years — without incurring any future tax liability.                 

The amount you can contribute to a Roth IRA may be reduced or eliminated depending on your filing status and your adjusted gross income level.

Whether the Roth IRA is a better option really depends on your expectation of your future tax rate. In the past, retirees routinely moved into a lower tax bracket. However, with more people maintaining high levels of income even in retirement, it may make more sense to pay taxes on your contribution today, while you're still employed.

Although investors can certainly open both a traditional and a Roth IRA, most financial advisers suggest that you convert your existing account to take full advantage of the Roth's long-term benefits. But before converting, consider these factors:                        to the top

• You can only convert if your adjusted gross income is not more than $100,000 for the year the conversion occurs.
• More importantly, you'll have to pay taxes — which can be substantial depending on how much you've amassed in your current IRA — on all deductible contributions and earnings. To avoid being hit with penalties, you must pay these taxes with non-IRA money. In fact, tax experts caution that if you don't have other cash handy to pay the tax, you're probably better off with a traditional IRA.                    to the top

An Education IRA (EDIRA, now called an Education Savings Account) lets you contribute up to $2,000 each year for anyone under the age of 18. When the beneficiary later withdraws the money to pay for qualified higher education expenses (for example, tuition, fees, room and board), the withdrawals will generally be tax-free.

But there are some conditions: if your adjusted gross income exceeds $190,000 (joint returns) or $95,000 (all others), the amount of contribution that you can make starts decreasing, and it disappears completely once your adjusted gross income exceeds $220,000 (joint returns) or $110,000 (all others).

Is an IRA right for you?  As a tax-deferred investment, an IRA is a good supplement to most retirement plans. Other tax-deferred investments may be a better deal, however. First participate in your company 401(k) or 403(b), which allow larger contributions and often have a company match. Some plans also allow you to borrow from the account. An IRA beats an employer's plan only when there are poor investment choices (such as company stock) and no company match. Keoghs and SEP-IRAs are usually better for the self-employed because they allow larger contributions as well.

An ideal candidate for an IRA is someone who doesn't have a company retirement plan or whose earnings fall below the IRA ceiling. If your earnings are too high, you can still invest in an IRA, although you can't deduct your contribution. Don't invest in an IRA if you will need the money in the next few years to buy a house or start a business.                                                

When can you open an IRA?  IRAs can be opened for a tax year from January 1 of that year until April 15 of the next year, and contributions can be made at any time along the way. This lets your money start working for you right away and allows you to fund it throughout that period. Alternately, it gives you a full 15 months to make a decision about whether an IRA is right for you.
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