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Know Your IRAs

It's kind of important to know your stuff when it comes to money. Consider IRAs. You may know the bare basics: that an IRA can help you build a secure retirement. But if that's all you know, you may end up sending your $4,000 contribution for 2005 to the wrong IRA -- perhaps to the International Reading Association, the Intercollegiate Rowing Association, the Inflammation Research Association, or the Illinois Restaurant Association. You get the idea -- ignorance is fraught with peril. (Though some of these outfits may actually put your money to good use, they won't help with your retirement.)

Below you'll find a quick guide to some high-profile IRAs, with some pointers to help you invest your hard-earned money effectively.

Ira Gershwin
If you're a fan of "I'll Build a Stairway to Paradise" and "Porgy and Bess," you're a fan of Ira Gershwin, George Gershwin's lyric-writing older brother and partner. According to the All Movie Guide, "It is now part of American folklore that the Gershwin boys' mother bought a piano so that Ira could take lessons, only to discover that it was George who had 'the gift.'" Ira ended up focusing on business as a young man, but soon found himself composing poems and clever lyrics. Eventually he teamed up with his brother and, later, Jerome Kern and others. This Ira has made many people's retirements more enjoyable, but he's not in any position to help your $4,000 grow over decades, invested in a top mutual fund or in shares of Apple (Nasdaq: AAPL  ) or PepsiCo (NYSE: PEP  ) . (Over the past 20 years, $4,000 would have become $78,500 if invested in Apple, or $75,500 in PepsiCo.)

Ira Glass
Another major American Ira is Ira Glass, who hosts a popular 10-year-old show, "This American Life," on public radio. As a Knight Ridder article noted: "With its 'movies for radio' approach, 'This American Life' has made stars of writers such as David Sedaris, Sarah Vowell, David Rakoff, and Scott Carrier, to name a few. Today, Glass and his contributors reach an average 1.6 million people via 500 radio stations for a weekly hour of stories, news, humor, and heartbreak. The show won a prestigious Peabody Award in 1996 for 'weaving original monologues, mini-dramas, original fiction, traditional radio documentaries, and original radio dramas into an instructional and entertaining tapestry.'" If this Ira is still in business during your retirement, he may well enhance it. But he probably won't be able to turn your $4,000 into $57,500 in 15 years, like Intel (Nasdaq: INTC  ) has done for its loyal 1991 investors.

Ira Packard
Then there's Ira Packard. He probably won't help you much with your retirement savings, either -- mostly because he's busy enjoying his own retirement after a career in dairy farming. He's a 95-year-old Mainer, who, according to the Waldo, Maine, Village Soup, golfs almost every day in his backyard. He also tends to his lawn and driveway meticulously each week. Ira is a model of how to spend your retirement doing what you love, but he won't help you buy that condo in Boca Raton.

Traditional IRA
This is a much better place for your retirement dollars than the preceding IRAs. For 2005, you can contribute up to $4,000 (if you meet certain qualifications) -- $4,500 if you're 50 or older. Do so, and the amount you contribute is deducted from your income -- and therefore isn't taxed. If you're in the 25% tax bracket, contributing $4,000 will knock $1,000 off your taxes in 2005. (You'll eventually be taxed on the IRA money when you begin withdrawing it.)

Roth IRA
For many of us, the Roth IRA is an even better option. You plunk post-tax money into it, so you get no up-front tax benefit. But if you appreciate delayed gratification, get this -- the money you eventually withdraw will be tax-free. So imagine that you opened a Roth IRA account (which you can do at most brokerages -- we can help you find one that charges very low commissions) and invested $4,000 in Valero Energy (NYSE: VLO  ) stock. Valero stock has nearly septupled over the past five years. Let's say that it increases in value tenfold over the next 20 years (that's roughly 12% annual growth), leaving you with $40,000 in your IRA. If your gain of $36,000 were taxed at current long-term capital gains rates, you'd probably be looking at a tax bill of more than $5,000. But since it's in a Roth IRA, your tax is . zero!

Learn more
There's a lot to learn and a lot to like about IRAs. Learn much more in our IRA Center, which features info on the various kinds of IRAs, eligibility restrictions, and how to open an IRA. It even offers a comparison chart for IRA accounts at TDAmeritrade (Nasdaq: AMTD  ) , E*Trade (NYSE: ET  ) , and Sharebuilder, permitting you to see fees and other data at a glance.

Finally, make sure you're tending to your big retirement picture. Begin planning now. We can help you reach your dreams with our Rule Your Retirement newsletter, which you can try for free.

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SelenaMaranjian'sfavorite discussion boards include Book Club, Television Banter, Eclectic Libraryand Card & Board Games. She owns shares of PepsiCo. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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