An individual retirement account (IRA) is one of the best ways you can accumulate something to invest because making contributions and earnings is often tax-free. An IRA must be established with a financial institution that has received Internal Revenue Service (IRS) approval to offer IRAs. These financial institutions include banks, brokerages, federally insured credit unions, and savings and loan associations. IRA accounts can be established at any time. Contributions must be made by the IRA owner’s tax-filing deadline (usually April 15 of the following year).

Tax-filing extensions do not apply. Traditional IRAs When you invest in a Traditional IRA, you don’t have to pay taxes on the money you earn in your account until you start withdrawing the funds during retirement. You may also be able to deduct your annual contribution to a Traditional IRA from your yearly income taxes. Qualifying for this benefit depends on how much you earn. Several rules affect withdrawals from Traditional IRAs. For example, you can’t begin withdrawing funds without penalties until you reach 591⁄2 years of age. If you withdraw funds before that time, you pay a hefty tax penalty. Additionally, you must withdraw funds when you turn 701⁄2 years old (the time when you can no longer contribute to a Traditional IRA).

Keep in mind that you have to pay taxes on the funds that you withdraw. Therefore, spreading your withdrawals across as many years as possible before you turn 701⁄2 years old is a wise choice. For example, if you withdraw a little at a time between the ages of 591⁄2 and 701⁄2, you can keep your taxes affordable. If you wait until you’re 701⁄2 years old to withdraw all your funds, the tax liability is similar to paying taxes on a large windfall or lottery win. Roth IRAs Roth IRAs were created by Congress in 1997. With a Traditional IRA, earnings accrue on a tax-deferred basis. With a Roth IRA, earnings accrue on a tax-free basis. For most situations, a Roth IRA is a better deal for those individuals who are eligible. Roth IRA withdrawals are tax free if the account is held five or more years and you’re 591⁄2 or older.

Withdrawals also are tax-free if you become disabled, if you’re purchasing a home for the first time, or if the account holder dies. Roth IRA eligibility is based on adjusted gross income (AGI) and phases out for individuals with AGIs of more than $95,000 and for couples who file joint tax returns with combined AGIs of more than $150,000 in 2004. Keep in mind that as long as you have earned income, you can contribute to a Traditional IRA until you turn 701⁄2. Investors older than 701⁄2 cannot contribute to a Traditional IRA, but can contribute to a Roth IRA. If you don’t have earned income but are married and file a joint return, you still can contribute to an IRA based on your working spouse’s income.

For more information about this topic, see these Web sites:

Employee Benefit Research Institute (www.ebri.org) is a nonprofit, nonpartisan organization that provides information and education about employee benefits. Find the latest information about IRAs.

Kiplinger.com (www.kiplinger.com/basics/managing/retirement/ roth1.htm) provides a large online retirement center that includes articles, resources, and online calculators.

Roth IRA Web Site Home Page (www.rothira.com) offers technical and planning information about Roth IRAs to practitioners and consumers.

The Motley Fool (www.fool.com/60second/ira.htm) provides “The 60-Second Guide to Opening an IRA.” This online guide offers step-bystep guidance for opening an IRA and a calculator to determine what type of IRA account is best for you. You’ll also find suggestions about where to invest your cash and brokerage comparisons. Online calculators for determining the best IRA account Several kinds of IRA accounts are available.

The Vanguard Group (flagship3. vanguard.com/web/planret/PTRetireCenterOV.html) has a Retirement Center that offers an online calculator to help you determine what kind of IRA is best for you. At the Retirement Center, click the I’m Starting To Save For Retirement link and then click What Kind Of IRA Is Best For Me? You’ll discover whether you can contribute to a Traditional or Roth IRA, find out whether you’re eligible to deduct your Traditional IRA contribution, calculate your maximum allowable contribution, project the long-term returns of each type of IRA, and then compare your options.

The Internet provides other online IRA comparison calculators at these Web sites: Morningstar.com (screen.morningstar.com/ira/iracalculator. html?tsection=toolsiracal), with your free registration, provides an IRA calculator to help you make better IRA decisions. Discover your eligibility, determine your contribution limits for Roth or Traditional IRAs, compare various scenarios to uncover which IRA is best for you, and discover whether you need to convert your traditional IRA to a Roth IRA. C alcbuilder (www.calcbuilder.com/cgi-bin/calcs/IRA1.cgi) offers an online calculator to help you determine which type of IRA account provides you with the most retirement income.