The first thing people want to know is who funds their retirement account. In other words, where does the money come from? The answer is fairly simple, it comes from YOU, unless you have a 401k, and then you plus your employer may match some of what you contribute.

The next thing most people are curious about is the taxes. The first thing that people want to know is when the money goes in. With a traditional non-deductible IRA the money goes into the account after taxes. With a traditional deductible IRA the money goes in before taxes. With a Roth IRA the money goes in after taxes. With a 401k the money goes in before taxes. This means that 401k and traditional deductible IRA contributions are tax deductible, and those to a Roth IRA and traditional non-deductible IRA are not. So, what about the taxes when you withdraw money after 59 ½? If you wait until 59 ½ to withdraw money, you pay taxes depending on the account you have. With a Roth IRA for example, you do not pay taxes on anything as long as the IRA is at least 5 years old. However, with a 401k and traditional deductible IRA, you pay taxes on the entire amount withdrawn. With a traditional non-deductible IRA you pay only on the interest you earn.

So, if you have one of these accounts, how much can you put in each year? Well, it depends on your age. If you are over 50, you can contribute up to $3500 a year for each type of IRA, and 10% of your income up to $16,000 if you have a 401k. Also, you contribute to a traditional IRA until age 70 ½ and as long as you want with a Roth IRA. In addition, with a 401k you can contribute as long as you are working full time.

At this point, most people want to know when do they have to take money out, and what kind of penalties will they face if they withdraw money early. The answer? For everything but a Roth IRA you have to start taking withdrawals at age 70 ½ and with a Roth IRA you never have to if you don't want to. If you with withdraw money before age 59 ½, however, you will face penalties. These depend on the type of IRA you have set up. For example, with a Roth IRA, you can withdraw money for a home or education, and any you contribute, but will pay penalty on any interest earned. So, talk to your tax advisor about the penalties you will face with the account you have, and your reason for withdrawing funds early.