Individual Retirement Accounts (IRAs)

There are two types of IRAs: the Traditional IRA and the Roth IRA. (see Traditional and Roth comparison chart)

Traditional IRA
A Traditional IRA lets you make annual contributions (up to $4,000 in 2007 and $5,000 in 2008) for retirement. For individuals age 50 and older, the maximum contribution limit jumps to $5,000 in 2007 and $6,000 in 2008. (see chart for contribution maximums)

If you meet certain eligibility requirements, all or a portion of your annual contribution to a Traditional IRA may be tax deductible. If neither you nor your spouse participates in an employer-sponsored retirement plan, your annual contribution is fully deductible. If you do participate in an employer's plan, the deductibility of your Traditional IRA contribution depends on your income.

Your Traditional IRA assets grow tax-deferred until you withdraw them in retirement (at age 59 ½), when they will be taxed as ordinary income. If you take withdrawals before age 59 ½, you may face a 10% early-withdrawal penalty in addition to income taxes. The IRS allows penalty-free withdrawals for qualified expenses, including post-secondary education, a first-time home purchase (up to $10,000) and certain medical costs.

You must start making withdrawals from your Traditional IRA by the time you reach age 70 ½.

Roth IRA
Annual contribution limits for the Roth IRA are the same as the maximum contribution limits for Traditional IRAs ($4,000 in 2007, $5,000 in 2008 and $1,000 additional catch-up contribution for those age 50 and older). Roth IRA contributions are not tax-deductible, but earnings in a Roth IRA accumulate tax-free. You may make tax- and penalty-free withdrawals of your contributions at any time. But, to make tax- and penalty-free withdrawals of your investment earnings, your Roth IRA must be at least five years old and you must be at least age 59 ½. You also may make penalty-free withdrawals in case of death or disability or to make a first-time home purchase.

You must meet certain income requirements to qualify for full or partial contributions to a Roth IRA. For married couples, your adjusted gross income may not exceed $160,000; for singles, your adjusted gross income must be less than $110,000. (see chart for contribution requirements)

Unlike a Traditional IRA, a Roth IRA has no mandatory withdrawal requirements. And, you can continue to make contributions at any age if you are still working or earning income.