For most of us, the best way to plan for retirement is with an IRA. There are several different types of IRAs, but the two you will most often hear about are the traditional IRA and the Roth IRA.
First, let’s look at the difference between in the two types of IRAs.
Traditional IRA: In the traditional IRA, income you invest into the IRA is tax deductible, and you earnings grow tax-free until you take the money out down the road, at which point the money will be taxed at your ordinary tax rate.
Roth IRA: Unlike a traditional IRA, contributions made into a Roth IRA are not tax deductible. The difference is that when you withdraw the money in the future, assuming it has been open over 5 years and you are older than 59 ½, the money, and earnings are tax-free.
One thing to remember is that in both cases, you are looking at a 10% penalty if you pull out the money early.
For both traditional and Roth IRAs, the 2012 limit on the amount you are able to contribute is $5,000, but that number will increase to $5,500 in 2013. For many of us, that is as much or more than we would contribute anyway. For some there is the desire and ability to contribute more than $5,500 a year to an IRAs. While that's not actually allowed, there are a couple of ways to generate extra cash in your account without going over the contribution limit.