There are many different types of Individual Retirement Accounts, with Traditional and Roth IRAs being the most common choices.

Traditional IRAs

• Allows tax-deductible contributions of up to $4,000 per year (more over age 50)
• Any contributions towards the IRA come off the participant's yearly income, thereby reducing total tax liability
• Once the money in an IRA is withdrawn, it is subject to standard income taxes
• Any money withdrawn before the age of 59 1/is subject to an additional 10% penalty in addition to taxes (this 10% penalty is waived if the money is used to cover approved higher education costs or for purchasing a house)
• Earnings on the account are tax deferred until withdrawal, which must begin at age 70 1/2; if the distributions are not taken at that age, there is a 50% penalty on the amount not taken.

Roth IRAs

Although Roth IRAs are not tax-deductible, they do provide greater flexibility than traditional IRAs. Contributions may be withdrawn from the account at any time without tax or penalty. However, earnings on those contributions can only be taken tax-free and without penalty after the account has been in operation for five years or more, the participant has reached the age of 59 1/2 or if the money is to be used for purchasing a house or to cover approved higher education costs.

There is a limit on annual contributions to these accounts of $3000 for individuals and $4000 for married couples. Individuals who file taxes using single status are eligible for full contribution as long as they don't exceed $95,000 per year in earnings, and $110,000 for partial contributions. Couple filing jointly face an earnings cap at $150,000 and $160,000 for full and partial contributions respectively. Contributions made after the limit are subject to a 6% penalty.

A traditional IRA can be converted into a Roth IRA without penalties if the adjusted gross income for the participant is less than $100,000 excluding the amount of the conversion. These contributions and any earnings are subject to taxation.

If the participant wants to leave the IRA account as part of their inheritance, transferring the funds from a traditional account to a Roth IRA can have great benefits for the heirs.

• There are no minimum distributions during the life of the owner.
• The conversion will reduce the participant's taxable estate by the amount of the taxes, therefore reducing the inheritance.
• If certain conditions are met, the account may be converted to a Roth and a new beneficiary named at the same time at that time, which would allow this person to keep the IRA during their expected life as calculated by the IRS.