Front-end and Back-end Tax Benefits

• The type of IRA you invest in dictates whether you realize a front- or back-end tax benefit. The IRS allows investors to deduct traditional IRA contributions, up to an annual cap, from their taxable income. This approach helps reduce your tax bill. While you don't receive that benefit with a Roth IRA, if you take a qualified distribution and have held your account for at least five years, all Roth proceeds, including earnings, come to you tax-free. Qualified Roth distributions include retirement withdrawals beginning at age 59-1/2; use of up to $10,000 of the funds to buy, build or rebuild a first home; or accessing the money after you have become disabled.
  
  

Tax-deferred Growth

• Both traditional and Roth IRAs enjoy the benefit of tax-deferred growth. When you receive earnings, such as capital gains, dividends and interest, in a regular, taxable investment account, the IRS requires you to report and pay taxes on them annually. With an IRA, you don't need to adhere to this reporting requirement; instead, you settle with Uncle Sam when you start taking withdrawals.
  
  

Versatility

• You can hold IRAs in brokerage accounts at many firms, giving you the ability to invest in a wide variety of products, ranging from stocks and options to more conservative bonds, certificates of deposit and money market accounts. IRAs also offer versatility in that you can use them for purposes other than retirement without penalty. Typically, when you withdraw IRA money prior to age 59-1/2, the IRS hits you with a 10 percent tax penalty. You can, however, access the money early under several circumstances, such as using the cash to pay higher education expenses, without fear of financial retribution from the IRS.
  
  

Withdrawal Choices

• With a traditional IRA, you must begin withdrawing money in the year after you turn 70-1/2 or face stiff IRS penalties. Roths use no required withdrawal mandate. When you are ready to start accessing your money, most firms allow you to take systematic withdrawals from your IRA by helping you figure how much you need to live comfortably and directing these funds electronically to your bank account.