Almost everyone who has earned income can benefit from using an Individual Retirement Arrangement, or, as theyre more commonly called, an Individual Retirement Account. IRAs come in several different versions, each with its own tax treatment and rules on who can contribute. Here is a comparison of some of those features:  Taxed at normal income tax rates  Original contribution not taxed but earnings/growth taxed at normal income tax rates  Note that the IRAs in the table above all have the same annual contribution limit--$5,000 per taxpayer for those younger than 50 and $6,000 for those 50 and older. If you fund two different types of accounts in a year, you can only contribute $5,000 or $6,000 combined. (This article wont discuss two other types of IRAs--Simple IRAs and SEP IRAs--which are designed for the self-employed and small businesses. For more details on those, click here. )  IRAs have many different rules that affect contribution limits and withdrawals. The Bogleheads Wiki offers an easy to read summary of many of those, but for the most complete and accurate information consult IRS Publication 590.  Which type of IRA account you should use depends on many factors. If you are a higher wage earner and have a retirement plan available through your employer, then you will have fewer options available. (You may not, for example, be eligible to fund a tax-deductible IRA.) It is also helpful to consider your current and future tax rates when making a final decision. If, for example, your tax rate will be higher in the future, a Roth IRA may be more attractive. However, predicting future tax rates accurately is not possible, making it difficult to know which type of account will be best for the future. So many people hedge their bets by diversifying their savings into before tax and after tax accounts.  Remember that investing in a Roth means that all of the money in the account belongs to you. Thats in contrast to a traditional deductible or a non-deductible IRA, where some percentage of the account balance really belongs to the government because taxes will be due on withdrawal. (All of the withdrawals from a deductible IRA are taxed; in a non-deductible IRA, your original contributions wont be taxed at withdrawal, but any earnings on those contributions will be.) Different states also have different regulations on taxing money held in IRA accounts, so carefully review your state regulations (and those of any state you plan to retire to) in addition to the federal income tax rates.  Money invested in an IRA must be held with a custodian. This can be a mutual fund company, brokerage firm or even your bank. Exercise caution when selecting an IRA custodian because fees for opening accounts, closing accounts, and the expense ratios for mutual funds or brokerage fees vary dramatically among custodians. Holding down costs leaves more money in your account growing for your benefit; even small differences in cost, over years of investing, can make a huge difference in your final account balance.  While implementing an investment plan many people become confused about which accounts to fund and when. A general rule of thumb for investing priority is:  No. 1: Invest enough in your workplace 401(k) to receive the full matching contribution available from your employer. No. 2: Maximize contributions to an IRA. No. 3: Put more in your 401(k) to reach the annual contribution limit. No. 4: Invest in a taxable account.  Remember, rules of thumb--including the one above--dont work for everyone. Some people may find it more beneficial to maximize all 401(k) contributions prior to opening an IRA of any type. Others may have reasons to invest in a taxable account rather than to maximize their use of tax-advantaged account options. However, for a majority of people, maximizing the use of all tax advantaged accounts and diversifying between before tax and after tax accounts is the best strategy for the long term.
After you grab your employer's 401(k) match, it's time to fund an IRA. But which kind is best?