To help you save for your golden years, the government has come up with several savings options designed specifically with retirement in mind. Individual retirement accounts give you tax incentives to put away money for your own personal retirement savings. Chances are you’re familiar with the IRA acronym, but you may have also heard of what’s known as a Roth IRA. If you’re still wondering what the difference is, it may be helpful to take a look at some of the similarities and differences associated with these two types of savings accounts.

A quick history may also help you get a better feel for these accounts. President Gerald Ford signed the Employee Retirement Income Security Act (ERISA) in 1974 to encourage personal savings. The IRA was born out of this act. The Roth IRA is a variation of the original plan that was introduced in 1998 and named after Senator William Roth, from Delaware, who introduced this plan to Congress.

To be eligible to set up and contribute to an IRA, to start with, you (or your spouse) must have some form of earned income. With a traditional IRA, you can make contributions up to the year you reach age 70½ and you may be able to deduct your contributions from your taxes, depending on whether you are covered by a retirement plan at work and if you fall within certain income limits. With a Roth IRA, the contributions are never tax deductible, but your income determines how much – if any – contribution you can make. The biggest difference between the two types of accounts has to do with taxes when it’s time to take your money out.

The traditional IRA gives you the advantage of tax-deferred earnings, which means you don’t pay any taxes until you decide to withdraw funds from the account. The Roth IRA, on the other hand, offers the potential of tax-free withdrawals, as long as you meet certain conditions.

With a Roth IRA, you can withdraw the money you have contributed at any time. In addition, as long as you have reached age 59½ and you have held the account for at least five years, you won’t have to pay taxes on your earnings either when you begin to take withdrawals.

It is important to keep in mind that the tax implications of early withdrawals are just part of the story. You also need to be aware of possible penalties and restrictions that may also apply. If you take withdrawals prior to age 59 ½, they will generally be subject to a 10 percent IRS penalty tax (for a Roth you would pay the penalty only on earnings, but for a traditional IRA you generally would pay on principal and earnings).

There are a few exceptions to this penalty, allowing you to use IRA withdrawals – without penalty – to pay for catastrophic medical expenses, buying your first home, or paying for a child’s college education.

Waiting too long to take your money out can hurt you too. If you’ve got a traditional IRA, when you reach age 70 ½ you must begin taking mandatory distributions, which are set according to an IRS schedule based on life expectancy. Roth IRAs do not have mandatory distributions during your lifetime.

Keep in mind, there is a cap on the amount you can put into an IRA each year. For 2006 and 2007, the maximum you can contribute is $4,000. If you’re 50 or older, you can put in another $1,000 bringing the total amount to $5,000. This additional amount is referred to as a "catch-up" contribution, to help those who may not have saved earlier in life.

No matter which type of IRA you decide to use, the most important step in planning for your retirement is to begin saving money. Whether you still have a ways to go before you get there, or even if retirement is just around the corner, it’s never a bad idea to prepare now for what lies ahead.

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This article was provided by A.G. Edwards & Sons, Inc., Member SIPC.