Types - Traditional IRA

There are four primary types of Individual Retirement Accounts in use today: Traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA. A Traditional IRA is a pre-tax IRA. You will receive a tax deduction for the amount contributed up to $5,000 unless you are age 50 or older, in which the limit is $6,000. (2009 limits are quoted here; future years will be indexed to inflation.) The amount that is tax deductible is reduced if you are an active participant in a 401(k) plan. However, taxes must be paid on both contributions and earnings when distributions are paid from the account. There is a 10 percent penalty for withdrawals made before age 59 1/2, and mandatory withdrawals must begin no later than age 70 1/2. You must have earned income to contribute to an IRA.

Types - Roth IRA

A Roth IRA is an after-tax IRA. You will contribute after-tax dollars to the account, with the same limits as a Traditional IRA, but if you meet certain conditions, all of the funds, including earnings, can be withdrawn tax-fee. There is no requirement to begin distributions at 70 1/2. However, there are income limits that don't exist in a traditional IRA. If you make over $120,000 in 2009, you cannot contribute. If you make between $105,000 and $120,000, you can contribute between $0 and $6,000. (There is IRS tax guidance on limits in this range.) If you make less than $105,000, you can contribute up to $5,000 if under age 50 and $6,000 if over.

Types - SEP IRA

An SEP IRA is a Simplified Employee Pension and is designed for self-employed business owners. It allows saving for retirement without the hassle of a 401(k) or other qualified retirement plan. Individuals who are not self-employed should not consider this option.

Types - SIMPLE IRA

A SIMPLE IRA is a retirement program for small businesses. Your employer would typically establish the account for you and offer you the option to contribute from your paycheck. If you work for a small business and don't have a retirement plan, you may consider inquiring with your employer.

Considerations

Each of the four IRA types were created to cover different types of workers, from small-business owners to the everyday employee saving for retirement. Today, most people can choose between a Roth and a Traditional IRA. Individuals looking to establish an IRA often inquire about the SEP IRA and "SIMPLE IRA. Think of these more as retirement plans, similar to 401(k)s, that require a business to establish, even though they have the IRA name.