You probably know how useful IRAs can be for your retirement savings and investments. With traditional IRAs, you get to contribute pre-tax dollars, which grow tax-deferred until they're withdrawn. This lowers your taxable income in the near term. With Roth IRAs, you contribute post-tax money and eventually withdraw your funds ... tax-free!

In the 2007 tax year, you can contribute up to $4,000 to a traditional or Roth IRA, and you can make that $5,000 if you're 50 or older (per a "catch-up" provision). It's all tantalizing, isn't it?

Well, hold on, because there's more to it. (Given that our tax code is reportedly more than nine million words long, some seven times longer than the Bible, we shouldn't be surprised that IRAs have lots of details to them.) Here's one of the niggling details to know: Not everyone qualifies to invest in an IRA.

The scoop
For 2007, to contribute the maximum allowed to a Roth IRA, your adjusted gross income ("AGI" to accountants at a cocktail party) needs to be below $99,000 if you're single or $156,000 if you're married and filing jointly. Single people with AGIs between $99,000 and $114,000, and joint filers with AGIs between $156,000 and $166,000, can qualify to contribute somewhat less than the maximum.

So what should you do? Well, you do have some options. Here are some:

  • You can make nondeductible contributions to a traditional IRA. In other words, you contribute post-tax money, which doesn't lower your taxable income. Once you do this, though, you can then convert that IRA to a Roth IRA. According to current rules, you'll be able to do so without any income limitations beginning in 2010 (until then, your AGI must be below $100,000). Yes, you'll owe some income tax on any earnings in the IRA that you convert, but you'd have owed income tax on it when you ultimately withdrew it from the traditional IRA anyway. And once it's in a Roth, it can grow and be withdrawn tax-free. (Note that the amount of your nondeductible contributions is not taxed, because that was post-tax money, already taxed, when you contributed it. You'll only be taxed on any earnings for the conversion.) There are even more considerations about conversions, especially if you have other IRA accounts. Learn more here and here and at
  • Max out your 401(k) or any other retirement accounts available to you at your workplace.
  • You might look into contributing to an SEP-IRA, if you qualify for it. It's particularly good for those who are self-employed. It permits you to contribute up to 25% of your business profits, so that can be much, much more than $4,000 or $5,000. (Learn more in this article and this one.)

Learn much more about IRAs in our IRA Center. I also encourage you to take advantage of a free 30-day trial of our Rule Your Retirement newsletter service. It's prepared by Robert Brokamp, a smart and witty guy who distills what you really need to know into a manageable volume each month. A free trial will give you full access to all past issues, allowing you to gather valuable tips and even read how some folks have retired early and well. Robert regularly offers recommendations of promising stocks and mutual funds, too.

Don't short-change the power of an IRA. If you invest your money in it effectively, it can grow rather powerfully. With stocks like Kohl's (NYSE:KSS), Harley-Davidson (NYSE:HOG), Harrah's (NYSE:HET), and T. Rowe Price (NASDAQ:TROW) all having average annual returns of 15%-20% over the past decade, your retirement money can grow quickly.

If you've got $50,000 stashed away in IRAs and it grows by 13% per year, on average, for 20 years, you'll end up with more than $575,000 -- and that's assuming you don't add any more to the IRA over the years, which you'll surely do (right?). If that money is in a Roth IRA, you'll be able to withdraw the money completely tax-free, as long as you play by the rules.

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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any one of our investing services free for 30 days. The Motley Fool isFools writing for Fools.