You know that IRAs exist, and that you're supposed to be putting money into one. But that's as far as you've gotten. What's this Roth business? What's a traditional IRA? And how do you choose? Flip a coin! No, we're kidding. Here's some guidance.

This is for you: If you're trying to decide what kind of IRA you want.

Hands-on time: 10 minutes, maybe less

Total time: Same

Cost: $0

IRA review: IRA stands for Individual Retirement Account — an investment account that has special tax advantages to encourage you to save for retirement. The biggest difference between a Roth and a traditional IRA is when you pay taxes — before you put the money in, or after you take it out.

What's a Roth IRA? It's an IRA that you fund with what are called post-tax dollars — your after-tax take-home pay. You use that post-tax money to make your Roth contribution, and then everything you withdraw in retirement-including any earnings-is tax-free.

What's a traditional IRA? It's an IRA that you contribute to, much like a Roth, except that you can take a tax deduction for your contribution, if you meet certain criteria. (Keep reading.) You'll pay taxes when you withdraw the money (plus earnings) in retirement.

Other differences

• You must start taking money out of a traditional IRA (if you haven't already) when you hit age 70. There is no mandatory distribution age for a Roth.


• If you take any money out of a traditional IRA before age 59, you'll pay taxes and a 10 percent penalty. But you can remove the principal (what you contributed) from a Roth without any penalties, as long as the money's been in the account for five tax years-and as long as you don't withdraw any earnings before age 59. For example, if you made a $3,000 contribution to a Roth in 2004 and it grew to $3,500 by 2010, you could withdraw up to $3,000 without penalty. (We're not saying you should. In fact, usually, you shouldn't. But you could.)

Are you eligible for one, but not the other? The government's rules might make this decision easier than you thought.

• You can make a Roth contribution in 2010 if you file your taxes as a single person with a modified adjusted gross income (AGI) of less than $120,000, or if you file jointly as a married couple, with joint income of less than $177,000. Not sure? Here's how to figure it out, or how to find your AGI from last year.


• Whether you can get a tax break for a contribution to a traditional IRA depends on how much money you make, and whether your workplace offers a retirement plan, like a 401(k) or a 403(b). Note: The criteria is whether your workplace offers one, not whether you're in it.


• If you're NOT covered by a retirement plan at work, you can make a tax-deductible contribution to a traditional IRA. If you're married, and your spouse is covered by a retirement plan, then your tax break depends on your income. (See this table.)


• If you ARE covered by a retirement plan at work and you make less than $66,000 per year (single) or $109,000 per year (married), you can make a tax-deductible contribution to a traditional IRA. (See this table.)

If you're eligible for both, ask yourself: Do you want to pay taxes now or later? The central difference between a Roth and a traditional IRA is when you'll pay taxes. For the record, if you're eligible to put money into a Roth, most financial planners will tell you to do that, because being able to withdraw money in retirement without paying any taxes is pretty sweet. Also, because you can get your contributions back without penalty (again: generally, not a good idea), a Roth offers a little bit of flexibility in the event of an emergency. (A better idea: Open an emergency fund.)

But do you need a tax break now? Predicting your tax future is dicey — no one can say for sure what taxes will be like in 30 years. If putting $5,000 into a traditional IRA this year saves you a ton on taxes right now, sometimes that's reason enough. You can figure it by plugging different income numbers into tax prep software, or if you have someone who does your taxes, he or she can tell you.

Want more help?
Plug some numbers into Morningstar's IRA Calculator. It'll evaluate your eligibility and compare Roth and traditional IRAs for your tax situation.

In the end, the important part is that you save for retirement. Don't let Which-One-Do-I-Choose paralysis keep you from putting any money away at all. Besides, experts suggest saving money in both pre-tax (i.e. a 401(k) or a traditional IRA) and post-tax accounts (like a Roth), so you have some options when you retire.

To learn more:
Choosing Between a 401(k), Traditional, and Roth IRA (LearnVest)
How Much Can I Contribute to an IRA? (Calculator)

Who helped: Jay Hutchins, a financial planner in Lebanon, N.H.; Ted Toal, a financial planner in Annapolis, MD

Did you do it? Tell us what worked or share other tips in the comments below.


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Related Links:

How to make an IRA contribution

How to choose investments for your IRA

How to decide where to open your IRA