Photo: Olympic National Park in Washington, US. Photo taken July of 2011.

From the 401k to the 403b to the IRA to Annuities, there are lots of ways to invest your money. This article starts a series on explaining the different types of retirement accounts and how they can be beneficial to you. This article will dive into the IRA and the Roth IRA.

For those of you who don't know, the letters in IRA stands for Individual Retirement Arrangements. These accounts are created as a way to save for retirement, without being taxed by the government on earning every year (like interest in a savings account). In both the IRA and Roth IRA, there is only a $5,500 contribution limit for anyone under the age of 50. Anyone 50 or older is allowed to invest $6,500 per year. This contribution is the total of all of your Roth and IRA accounts. This means that you could invest $3,000 in an IRA and $2,500 in a Roth IRA in one year. However, you cannot invest $5,500 in an IRA and $5,500 in a Roth IRA in the same year.

The IRA Basics:

$5,500 Contribution Limit ($6,500 Contribution limit if 50 or older).
Contribution Limit does not apply to Rolling over funds from a previous account.
Possible Savings Credit on Taxes based on income.
Ability to open a Spousal IRA for Stay-at-home parents with same contribution limit
The spousal IRA allows married couples filing jointly to contribute $11,000 in one year ($13,000 if over the age of 50)
Possibility to deduct contributions on Taxes depending on Income.
Allowed one Rollover per year.
Require minimum distributions at the age of 70 1/2
Money grows tax free (tax-sheltered), until distributions or withdrawals.
Once the money is withdrawn, then you will be taxed at your income level.

The Roth IRA Basics:

Tax Free growth and Tax Free Withdrawals.
$5,500 Contribution Limit ($6,500 Contribution limit if 50 or older).
Contribution Limit does not apply to Rolling over funds from a previous account.
Possible Savings Credit on Taxes based on income.
Ability to open a Spousal IRA for Stay-at-home parents with same contribution limit.
The Spousal IRA allows married couples filing jointly to contribute $11,000 in one year ($13,000 if over the age of 50).
No tax deductions available for the Roth IRA.
Rollovers from traditional IRAs to Roth IRAs are not limited.
No required minimum distributions while the account holder is alive.
Can make contributions after the age of 70 1/2.
Roth IRA has an income limit (essentially if you make too much money, then you can't contribute).
People who make a higher income can contribute to a Roth IRA through the Backdoor Roth (a rollover from a traditional IRA to a Roth IRA).

The IRA and Roth IRA are both great options for saving for retirement. The fact that there is a contribution limit is a real negative, because it is always better to save. The contribution limits require us as the investors to use multiple retirement accounts to meet our retirement goals. Personally, I believe the Roth IRA is the best savings vehicle for retirement. The main reason being that you are contributing after tax dollars and the money will grow tax free along with tax free withdrawals. That means that the money in the Roth IRA can be withdrawn and used in retirement without the government taxing your money.

My personal recommendation would be to use the Roth IRA first, unless your company matches in a 401k or a 403b. The main reason I make this decision is because of the fact that the money is tax free when you withdrawal it out of the account. My own personal investing plan is as follows:

1. Roth IRA

2. 403b

3. House Payments

4. Savings for large purchases

5. College Funds (after birth of child)

6. Brokerage Investments (after the house is paid off).

7. Rental Properties (after the house is paid off).

As of today, I am only investing in the first four buckets. As I noted above, the parts of the investing plan parts 6 and 7 will start after the completion of house payoff. I do this, because I prefer to be out of debt and have less risk. Debt is risk and a paid off house never reaches foreclosure. Having a plan is half the battle when it comes to reaching the financial summit. Planning, preparing and sacrificing will set you up for success. If you haven't started your retirement plan today, start right now! Starting early is the best way to prepare for a future of financial success.