What is an IRA?

IRA stands for Individual Retirement Account. An IRA is basically a retirement savings account with tax advantages; making it an ideal way to sock away cash for your retirement. A lot of people mistakenly think an IRA itself is an investment - but it's just the basket in which you keep stocks, bonds, mutual funds and other assets.

Unlike 401(k)s, which are accounts provided by your company, the most common types of IRAs are accounts that you open on your own. Others can be opened by self-employed individuals and small business owners. There are several different types of IRAs, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.

Unfortunately, not everyone gets to take advantage of them. Each has eligibility restrictions based on your income or employment status. All have caps on how much you can contribute each year and penalties if you yank out your money before the designated retirement age.

What is the difference between Traditional and Roth IRAs?

The main difference between traditional and Roth IRAs is when you pay income taxes on the money you put into them. With a traditional IRA you pay the taxes on the back end, that is, when you withdraw the money in retirement.

With a Roth IRA, it's the exact opposite. You pay the taxes on the front end, but there are no taxes on the back end.

Remember, in both traditional and Roth IRAs, your money grows tax free while it's in the account.

There are other differences too. While almost anyone with earned income can contribute to a traditional IRA, there are income limits for contributing to a Roth IRA.

Roth IRAs are more flexible if you need to withdraw money early.

With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older. With a traditional IRA, by contrast, you must start withdrawing the money by the time you reach age 70½.

Withdrawals prior to age 59-1/2 may be subject to 10% IRS penalty

Information from this article was provided by CNN Money

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