An individual retirement account (IRA) is a tax-advantaged retirement account that you set up, fund and manage on your own. There are numerous types of IRAs currently available to retirement-minded investors, including traditional IRAs, Roth IRAs, Rollover IRAs, SIMPLE IRAs and SEP IRAs. Traditional IRAs and Roth IRAs are the most common, while rollover IRAs are used to transfer money out of a former employer’s retirement plan. SIMPLE IRAs and SEP IRAs are types of traditional IRAs offered by employers who can’t afford the costs or a 401(k) or who want to provide an alternative.

When you invest with an IRA, you get to choose your type of account as well as the financial company that will manage your investments. In some ways, getting an IRA is similar to getting a car or a television: First you decide what you need, then you go out and find a business that provides the specific product and services you desire at a price you like.

What is an IRA?

An IRA can help you develop a more confident financial outlook on retirement. Unfortunately, there are few financial promises you can bank on regarding retirement these days. The long-term outlook for Social Security is uncertain, so there’s no guarantee that the system currently in place will still be providing benefits a decade or two down the road. In addition, very few employers offer guaranteed pensions to their employees. As a result, it’s more important than ever for you to assume responsibility for your own financial future. That’s where an IRA can be a valuable tool.

IRAs offer a convenient way to contribute and invest for long-term goals, and they offer tax benefits as well. An IRA is very similar to a 401(k) plan. You make monthly contributions, and the money is invested in a portfolio of securities. Unlike a 401(k), you’re not limited to the investment options offered by a plan sponsor. You decide what goes in your portfolio-anything from mutual funds to individual stocks and bonds.

Depending on the type of IRA you choose, you may be able to deduct your contributions from your taxable income during your working years and defer taxes until retirement. Or, if you forego the benefits of deducting contributions, IRAs may allow you to earn tax-free investment returns and receive tax-free withdrawals during retirement.

Another benefit of IRAs is their ability to help you coordinate various retirement accounts. If you’ve changed jobs a few times over the last several years, you may still have money in retirement plans from several former employers. This forces you to manage several different investment portfolios and sort through several sets of account statements. By transferring all of those assets to a single Rollover IRA, however, you could greatly simplify your financial life. All of your retirement assets would be invested in a single portfolio, resulting in easier account management and a lot less paperwork.

What is a Traditional IRA?

Traditional IRAs debuted in 1974, and they remain the most popular IRA choice. According to the nonprofit Investment Company Institute, approximately 33% of US households currently have at least one traditional IRA.

Your adjusted gross income determines whether your contributions to a traditional IRA are tax-deductible. There’s a cap on annual contributions as well, which depends on your age. If you’re under 49, you can contribute up to $5,000 to an IRA in 2008. If you’re over 50, IRS catch-up rules apply, and you can contribute up to $6,000. These limits could increase by $500 each year, depending on the rate of inflation.

Any investment earnings are allowed to compound on a tax-deferred basis, meaning that taxes are delayed until you make withdrawals later in life. Taxes on withdrawals from traditional IRAs will be taxable as income at then-current income tax rates. Considering that many people move into a lower tax bracket when they retire, a traditional IRA can be a prudent way to manage taxes throughout your life.

What is a Roth IRA?

A Roth IRA has the same contribution limits as a Traditional IRA, but your contributions to a Roth IRA are never tax-deductible. On the bright side, all investment earnings in a Roth IRA and all qualified withdrawals during retirement (or after age 59 ) are tax free.

A Roth IRA also has two hidden benefits. First, you can continue to make contributions as long as you like (you must stop contributing to a Traditional IRA at age 70 ). Second, you can withdraw money from a Roth IRA to buy your first home without paying taxes, as long as the money has been in the account for at least five years.

If your adjusted gross income is low enough that you qualify for tax-deductible contributions to a traditional IRA, then you’ll need to evaluate whether a Roth IRA or a Traditional IRA makes the most sense for you. If you can’t deduct your contributions to a Traditional IRA, then the future tax benefits of a Roth IRA may be more attractive to you. After all, if you can’t deduct your IRA contributions, you may as well go for an account that offers tax-free (rather than taxable) withdrawals.

What is a Rollover IRA?

A rollover IRA is a special type of traditional IRA that you can use to move money out of a former employer’s retirement plan-such as the 401(k) plan at your old job-without losing any money to taxes or early withdrawal penalties. In general, this is the best option to pursue if you change jobs and can’t leave your money in your former employer’s 401(k) or if you want to minimize the paperwork that comes from having several 401(k)s.

One thing to remember about a Rollover IRA is that you’re an individual investor, and some of the mutual funds available through a 401(k) may not be available to you. If you’re happy with your 401(k)’s performance and you don’t need to move your money, find out what investment options are available before making the switch.