Most Americans do not contribute to an Individual Retirement Account (IRA) and many lack an understanding of how IRAs work and why they might be advantageous. Given that an IRA can offer some tax relief while also strengthening your retirement savings, spring is a good time to get a better understanding of the how an IRA might work for you.

IRAs are plans that offer tax advantages for retirement savings. There are two basic types of IRAs: Traditional and Roth.

Traditional IRAs

Contributions may be fully tax deductible if neither you nor your spouse is covered by a retirement plan at work such as a 401(k) and your investments grow tax-deferred until withdrawn. If you earn too much to deduct your traditional IRA contribution you can still contribute on an after-tax basis. Your money will grow tax-deferred until withdrawal. The portion that was contributed after-tax will not be taxed upon withdrawal.

Roth IRAs

Contributions are made on an after-tax basis but the money comes out of your account tax-free provided certain requirements are met. The two main requirements are that the initial Roth IRA contribution was made at least five years ago and that you are at least 59 ½.

In 2013, for both the Roth and traditional IRAs, the contribution limits are $5,500 plus an additional $1,000 for those 50 and over.

An IRA is a type of account, not a specific investment. Your funds can typically be invested and traded amongst a variety of mutual funds, stocks, bonds, CDs, and even precious metals. Your risk tolerance, age, and needs will help determine the arrangement of your portfolio.

The IRA is an important consideration if you are not covered by a workplace retirement plan. It is, however, important to shop around. Each of us has individual needs and getting your money into an institution that fits your needs is important.

IRA accounts must be considered when you are evaluating your retirement savings plan. The tax advantages and opportunity for growth can be very attractive. Further research is likely necessary to determine the best fit for your situation, but that research will pay off handsomely down the road.

Source: U.S. News and World Report