An IRA is an Individual Retirement Account, and provides either a tax-deferred or tax-free way of saving for retirement. There are many different types of accounts within the world of IRAs, depending on the financial goals and situations of each individual, though traditional and Roth IRAs are the most common choices.

A traditional IRA allows tax-deductible contributions of up to $4,000 per year, or more if you are over age 50. Whatever you contribute towards your IRA comes off your yearly income, thereby reducing total tax liability. However, once the money in an IRA is withdrawn, it is subject to standard income taxes and an additional 10% penalty if withdrawn before the age of 59 1/2. An exception is made if the money is used for purchasing a house or to cover approved higher education costs. Standard income tax still applies, but the ten percent penalty is waived. This provides a great investment tool with flexibility for important purchases.

Roth IRAs were created in 1997 to help middle-class Americans. These IRAs are not tax-deductible, but provide even greater flexibility than traditional IRAs. Contributions to the account can be withdrawn at any time without being subject to penalty or tax, though interest earned in the account is. After five years, both contributions and earnings in the account can be withdrawn without penalty or taxation. The same benefits concerning education and housing also apply as with the traditional IRA.

A Roth IRA isn't for everyone, though. 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. Joint filers face an earnings cap at $150,000 and $160,000 for full and partial contributions respectively. High-level corporate execs need not apply for this type of IRA.

Choosing IRAs can be complicated, depending on the financial situation and may require the services of a certified financial planner. Another important decision may be whether or not to rollover a traditional IRA into the new Roth IRA. Generally speaking, if the person is eligible, contributing to a Roth IRA is always more advantageous due to the fact that income taxes will not apply later when the money is taken out, provided the person adheres to all the guidelines. But be sure there is enough time to absorb the costs of the rollover, since it will be taxed as if you were taking the money out of the IRA.