Types of IRAs

• There are two main types of IRAs: traditional and Roth. The main difference between the two is how the taxes are assessed on the accounts. In a traditional account, taxes are not paid on contributions. This effectively reduces your taxable income.
  
  In a Roth account, contributions are taxable at the time of investment but there are no taxes on distributions. As a result, traditional accounts have required minimum distributions at age 70 1/2 and Roth accounts do not.
  
  

Uses of Different Accounts

• When considering which type of IRA to use, decide if you are likely to have significant pay increases before you retire. When income is lower, and, therefore your tax bracket is lower as well, consider using a Roth account as it will save you money on taxes in the long run. When income is high, a traditional account can provide current tax relief.
  
  

Contribution Limits

• According to the IRS, as of 2010 the contribution limit on IRAs was $5,000 dollars per year or 100 percent of annual earned income, whichever is less, for people under the age of 50; $1,000 is added as a catchup modifier for those 50 and over. This amount can be in a Roth, a traditional or both but total contributions cannot exceed the overall contribution limits.