Income Tax Deduction

• An IRA allows taxpayers to deduct contributions from taxable income. Often a taxpayer can contribute to an IRA when taxes are filed. If a taxpayer has a retirement plan at work, then the IRA contribution is only deductible if income is less than $53,000 or if married, $85,000. When a taxpayer reaches age 70-1/2, the money in the IRA must start to be withdrawn.
  
  

Tax-free Gains

• Unlike a traditional investment, IRA capital gains are not taxed each year. Capital gains accumulate inside an IRA and this can build up a retirement nest egg. Many investors sell stock and incur capital gains taxes each year. Long-term capital-gains rates max out at 15 percent, as of 2011. Taxpayers can take funds out of an IRA without penalties once a year provided the amount is repaid within two months.
  
  

Roth IRA

• Roth IRAs are a good option for taxpayers interested in a tax break in the future. Roth IRA contributions are not deductible, however they are never taxed. For example, a taxpayer's $1,000 contribution to a Roth IRA doesn't qualify for a deduction in taxable income the year the contribution is made, but the $1,000 invested grows tax-free. When the money is withdrawn the individual pays no taxes. When traditional IRA funds are withdrawn, taxes must be paid.
  
  

Tips

• Retirement funds are important sources of income for many older citizens. In addition to deciding to fund an IRA or Roth IRA, a taxpayer must next decide what type of investment to put cash into. Stocks, bonds, and mutual funds are all popular choices. Individuals should pay close attention to fees when investing money. Fees can significantly impact a portfolio's value over long periods of time. A good option for many investors is a low fee Vanguard Index fund.