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IRA Basics: Fund Your Future

At tax time, it pays to know the advantages

dollar sign in a construction level, IRAs to fund your future

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The right IRA can help you grow your retirement savings.

En español |  An individual retirement account (IRA) can provide tax advantages that allow your money to grow faster, giving you more money in retirement. Consider these basics when deciding if putting some money (or more money) in an IRA is right for you.

What is an IRA?

An IRA is an investing tool used by individuals to earn and earmark funds for retirement savings; it comes in different varieties. The two most common are traditional and Roth IRAs. Traditional IRAs give a tax deduction when you contribute but are usually taxable when you withdraw. Roth IRAs, on the other hand, give no up-front tax deduction but you typically owe no taxes when you withdraw. You can think of a traditional IRA as tax deferred and a Roth IRA as tax free.

Which is better for me — a traditional or Roth IRA?

In general, if you believe you are at a higher tax rate today than you will be when you withdraw the money, then a traditional is probably better. No one knows future tax rates, however. Mike Piper, author of Taxes Made Simple, recommends investing in both to achieve tax-diversification. There are additional differences, including when funds can be withdrawn without penalties. Ordinarily, a traditional IRA has a 10 percent penalty if withdrawn before age 591/2, and one must start withdrawing shortly after age 701/2. Roth IRAs generally have more flexibility.

See also: How to give less to the IRS and keep more of your savings

How much can I put into an IRA?

Each person can contribute up to $5,500 annually. If you are 50 or over, you can contribute up to $6,500 each. You must, however, have earned income, such as wages or salary, equal or above the amount contributed. If, for the 2016 tax year, your income is over $117,000 for singles, or $184,000 for married, the amount you can contribute to a Roth IRA is limited.

Can my spouse and I each have one? Or is the maximum amount limited to a household?

You each can contribute to your own IRA. In fact, the earned income rule can be spread to both spouses if you file a joint return. For example, if one spouse didn't work but the other spouse earned $13,000 and both were over 50, each spouse could contribute the maximum $6,500.

Can I contribute and get a deduction even if I'm eligible to contribute to a 401(k) retirement plan at work?

Yes, but you will get a full IRA tax deduction only if your modified adjusted gross income is below certain limits — typically $61,000 for singles and $98,000 for married filing jointly.

If I have a 401(k) and an IRA, which one should I fund first?

First, you almost never want to miss out on any employer matching on your 401(k), so funding up to the amount your employer matches comes first. Beyond that, I typically recommend money go into whichever vehicle has the lowest costs and broadest choices.

See also: How to pay less taxes in retirement

Is it too late to contribute and get the deduction for 2016?

No. This tax season you have until April 18 to make a contribution and deduct it on your 2016 tax return. Often the tax filing deadline is April 15 of the following year, but it's best to make your contribution earlier.

I've always said investing was simple; I never said taxes were. Though there are many exceptions, the answers I've provided to the questions above give you some guidelines to think about and discuss with your tax adviser. Tax breaks are always a good thing, and both traditional and Roth IRAs can be beneficial.

Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.