An IRA offers special tax advantages so your investments have a chance to compound faster than they would in a regular, taxable brokerage account. And that means potentially more money for retirement.

Assumptions: $2,000 after-tax contributions at the beginning of each year, hypothetical 8 percent annual return, 28 percent federal tax rate on the taxable income. Earnings are taxed at 28 percent federal tax rate at time of withdrawal. Anticipated value of tax-deferred account if balance is withdrawn as lump sum and taxes paid at 10 years: $28,310; 20 years: $82,369; 30 years: $192,978.

This chart is for illustration purposes only and the 8 percent return illustrated above is not indicative of a specific investment product. Investments are subject to principle fluctuation, such that the investor may receive less than the original amount invested. This graph does not reflect any account fees or other expenses. All proceeds (if any) are reinvested each year until withdrawal.

IRA contribution limits

								2001			2002
		Single			Under 50			$2,000			$3,000
					50 and older			$2,000			$3,500
		Married			Both under 50			$4,000			$6,000
					Both 50 and older			$4,000			$7,000

For simplicity, we'll use the 2001 limits.

Contributions to a Roth IRA, on the other hand, are never tax deductible. However, a Roth IRA allows you to grow and withdraw your money completely tax free. The catch is that you can only contribute the full $2,000 to a Roth IRA if your modified adjusted gross income (MAGI) is $95,000 or less—$150,000 or less if you are married, filing jointly. That $2,000 maximum gets smaller according to a sliding scale as MAGI goes up, finally reaching zero at $110,000—$160,000 if you are married, filing jointly.

One last note: If you have a traditional IRA, you must begin withdrawing money when you turn 70½—a stipulation better known as required minimum distributions. There are no RMDs with a Roth IRA.

Traditional IRA contributions are deductible with the following exceptions: If you participate in your company's 401(k) plan (or any other qualified plan), you can deduct your IRA contribution only if your MAGI is less than $33,000 if you are single, or less than $53,000 if you are married and filing jointly.

If you do not participate in a 401(k) or other qualified plan but your spouse does, your traditional IRA contribution is fully deductible if your MAGI is less than $150,000 and you are filing jointly ($10,000 if filing separately).

Technicality alert: Even if you don't put money into a 401(k), your ability to deduct your traditional IRA contribution could be hampered if you work at a company that offers a 401(k) or other qualified plan. That's because most qualified plans consider you to be participating whenever you become eligible, unless you opt out or must enroll to participate. You may want to check with your employer to make sure you are classified correctly.

Plus, 401(k) retirement plans sometimes have limited investment choices. Remember, with an IRA you can invest in most any CD, money market fund, mutual fund, stock or bond you like. So, if you'd like to explore investments, an IRA gives you the freedom to do that.