• There are two primary types of Individual Retirement Accounts (IRAs)--Roth and traditional IRAs. Each offers its own unique tax benefits. Both provide the power of tax-deferred growth, which means earnings--such as capital gains and dividends--on your contributions are not taxed yearly the way taxable accounts are. If you own an IRA or are considering setting one up, there are some basic facts you should know.
  
  

Are My IRA Contributions Tax-Deductible?

• If you contribute to a traditional IRA, those funds--up to a yearly limit--are tax-deductible. This means that you can reduce your taxable income by the amount you contribute, not the total federal tax that you owe. The yearly limit changes frequently. Roth IRA investments are not tax-deductible. You put after-tax earned income into a Roth IRA.
  
  

Am I Taxed When I Withdraw IRA Funds At Retirement?

• When you withdraw your Roth IRA money at the IRS retirement age of 59.5 years, it comes out tax-free. This even includes earnings on your contributions. Traditional IRAs are a different story. Since the IRS gives you a front-end tax break with a traditional IRA, you have to pay Uncle Sam when you take out your money. Your withdrawals are taxed at your regular income tax rate at the time you execute them.
  
  

What If I Need My Money Early?

• Generally, in both Roth and traditional IRAs, if you need to access your money before you turn 59.5, you are subject to a 10 percent tax penalty. IRS Publication 590 lists several exceptions to this rule, however. You can take out IRA funds penalty-free if you become disabled, use the money to pay unreimbursed medical expenses that equal more than 7.5 percent of your adjusted gross income, are the beneficiary of a deceased IRA holder, are taking payments in the form of an annuity, are paying qualified higher education or first-time homebuyer expenses, are taking a qualified reservist distribution or satisfying an IRS levy.
  
  

Does the IRS Make Me Take My Money Out At Some Point?

• With a Roth IRA, you can leave your money sitting in your account for as long as you like with no penalties and no worries. This is not the case with a traditional IRA. The IRS wants you to start paying income tax on that money at some point. Once you turn 70.5 years old, you must start taking what the IRS deems "Required Minimum Distributions," or RMDs. Your RMD is based on your account value, age and life expectancy. If you don't take an RMD in a given year, the IRS hits you with a 50 percent excise tax on the difference between what you took out, if anything, and what you were supposed to take out.