When you begin looking into IRA plan options it's easy to become completely overwhelmed by all the different choices and options. For most people who are employed by someone else and working for wages there are basically two types of accounts to choose from: A Traditional IRA or a Roth IRA.
The Traditional IRA - This is a plan where your contributions are tax deductible so if you contribute $5000 in a given tax year it reduces your taxable income for that year by $5000. The benefit of this is that you will pay less tax as a result of this contribution. A second benefit is the tax deferred growth within the account, you can let it grow until you reach 70 1/2. As a result all your money is compounding instead of having to take some out for tax, this makes it grow faster. he downside of making traditional ira contributions is that you won't be able to withdraw the money until age 59 1/2 without incurring a penalty and when you do make withdrawals they will be treated as taxable income.
The Roth IRA Plan has one primary difference from the other IRAs in that the contribution is done with after tax money so it's not deductible from your taxes. This means that any contribution made to a Roth IRA will not reduce your current tax burden which is the only drawback for this type of plan. The benefits are that in addition to having your money grow tax deferred until retirement, your withdrawals from this plan are not taxable. So by paying more tax now you save lots of money later on.
The Traditional IRA and Roth IRA Contribution Limits for 2010 and 2011 are $5000 for those under 50 years old and $6000 for those 50 or above by the end of the contribution year. If you or your spouse currently have a retirement plan other than this IRA you may be subject to Modified Ajusted Gross Income limitations as well, so you need to double check the IRA Rules to make sure you are within the limits. It's best to check the Roth IRA Rules as well if you choose to contribute to a Roth account as they have their own limitations based on your Modified AGI.
