Work for a job that doesn’t offer a 401k or other retirement plan? You simply have to open one and contribute to it yourself. An Individual Retirement Account (IRA) is the plan for you.
An IRA is considered a tax-advantaged account because your retirement savings grow tax-deferred. Simply put, you don’t pay income tax on any money that remains in the plan. For 2012, you are allowed to contribute $5,000 ($6,000 if you’re aged 50 or older). There are two main options to choose from, the traditional IRA and a Roth IRA.
With a traditional IRA, you get an upfront tax deduction on your contributions. Earnings grow tax-free but you do pay taxes once you withdraw money. If you withdraw money before you reach 59 1/2 years of age, you also pay a 10% penalty on that disbursement.
With a Roth IRA, there is no upfront tax deduction. You contribute already taxed income to fund a Roth. The key here, is that all withdrawals are tax free provided certain conditions are met. You must be 59 1/2 and have held the plan for at least five years. The 10% penalty applies only to earnings. You may withdraw the principal anytime tax free.