You know there are two main kinds of IRAs, right? (IRA is an acronym for "individual retirement arrangement" -- yes, "arrangement.") There's the traditional IRA and the Roth IRA. Either can serve you very well as you diligently sock money away for retirement.
Here's how the traditional IRA works. This year, you can contribute up to $4,000 (if you meet certain qualifications) -- $4,500 if you're 50 or older. 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 -- but that's much later, after it has had a chance to grow in a comfy, tax-deferred environment.
The Roth IRA is even more compelling for most of us. You plunk post-tax money into it, so you get no up-front tax benefit. But for fans of delayed gratification, things can't get much more enticing -- 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 eBay (NASDAQ:EBAY) stock. eBay stock has just about tripled 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!
There's a lot to learn and a lot to like about IRAs. Find out 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 Ameritrade (NASDAQ:AMTD), E*Trade (NYSE:ET), and Sharebuilder, so you can see fees and other data at a glance.
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Finally, make sure you're tending to your big retirement picture. Begin planning now. We can help you reach your dreams with our Motley Fool Rule Your Retirementnewsletter -- try it for 30 days for free!
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Longtime Fool contributor Selena Maranjian owns shares of eBay.
