Whether your leisure years are many miles away or just around the corner, there's an individual retirement account (IRA) that will steer you in the right direction—yes, even if you have a 401(k) or some other retirement plan. Read on to find the IRA that will help you navigate your future with ease.

By Yelena Moroz
Updated November 21, 2011
Deep Local

1. Are you self-employed or a freelancer, or do you own a small business?

If yes: A simplified employer pension (SEP) plan is the way to go. "A SEP is like a traditional IRA for the self-employed and small-business owners," says Martha Maeda, the author of The Complete Guide to IRAs and IRA Investing ($25, amazon.com). "Since you don't have an employer-sponsored retirement account, like a 401(k), that you can put savings into, a SEP lets you put away more tax-deferred money—up to $49,000 a year—than any other type of IRA."

If no: Go on to the next question.

2. Are you employed (full-time or part-time)?

If no: If you are currently unemployed, you cannot contribute to an IRA, even if you have savings or an inheritance to invest. If your spouse is employed and you file a joint tax return, your working partner can open and contribute to a ROTH IRA or a traditional IRA on your behalf.

If yes: Go on to the next question.

3. Do you hope to contribute more than $5,000 a year?

If yes: Both a Roth IRA and a traditional IRA have annual-contribution caps of $5,000 ($6,000 if you're over 50), so if you want to save more than that, you will need to look into non-IRA options. Put aside as much as you can in your employer-sponsored 401(k) or 403(b), if you have one. Then call a fee-only financial planner (find one at findanadvisor.napfa.org) and ask about options like mutual funds, stocks, and bonds. Or research low-cost mutual funds on your own at Fidelity.com or Vanguard.com.

If no: Go on to the next question.

4. Does your annual gross income* exceed $122,000? Or, for joint tax filers, does your annual gross income exceed $179,000?
*This includes income from interest, dividends, and pensions but excludes tax exemptions, such as contributions to a 401(k) or a flexible spending plan.

If yes: You should invest in a traditional IRA. A Roth IRA has an income limit of $122,000 ($179,000 for joint tax filers); this account is the one you can contribute to regardless of how much you make. And investing in a traditional IRA reduces your annual gross income—which, if you're on the cusp of a higher tax bracket, could mean a lower tax bill come April.

If no: Go on to the next question.

5. Is it important to you to bequeath some or all of your IRA savings to your kids in the future?

If yes: Opt for a Roth IRA. "It's definitely a better estate-planning vehicle than a traditional IRA if you think that you might pass money to your children," says Candace Bahr, an investment adviser in Carlsbad, California. Your beneficiaries will receive your savings without having to pay any income taxes to Uncle Sam, whereas the heirs who receive money from traditional or SEP IRAs must pay income taxes on their inheritance.

If no: Go on to the next question.

6. Do you anticipate that you'll have a significantly lower income at age 59 ½, or are you already 59 ½ or older?

If yes: Choose a traditional IRA if you're nearing retirement or if you're planning on working only part-time later in life. In retirement, you'll typically be in a lower tax bracket than you were when you were working, so you'll pay less tax on the money withdrawn from your IRA than if you paid them on the contributions now (which a Roth requires).

If no: Go on to the next question.

7. Do you plan to keep your account open for at least 15 years before making any withdrawals?

If yes: Invest in a Roth IRA. If the account will be open for more than 15 years, the gains that your investment earns will usually outweigh the tax deduction that you would take now with a traditional IRA, says Bahr.

If no: A traditional IRA is your best option. Your investment won't have much time to grow, so you should take the tax deduction now.

Now that you have found the type of IRA account that fits your needs, get more details on how the plan works.