Eligible workers have two distinct choices when it comes to opening an Individual Retirement Account (IRA). The original IRA account was tax deductible, with the proceeds taxable only after they had been withdrawn in retirement. The newer version, known as the Roth IRA, reverses this tax treatment. While the funds invested cannot be deducted from current income, the proceeds can be withdrawn tax free.

This tax free treatment can be a huge incentive, especially for those workers with plenty of time to invest. The power of compounding can mean a substantial nest egg will be built up over time, and the ability to withdraw the funds tax free can be a great advantage.

A Roth IRA can also be an excellent choice for those workers who expect their tax bracket to stay the same or rise once they enter retirement. While many workers see their income decline as they enter retirement, others are in the happy position of having a higher income in retirement. The tax free nature of Roth IRA proceeds can make these account quite attractive for such investors.

If you are unsure which option is right for you it is important to examine both your current finances and your estimated future financial position. Estimating future finances is never easy, but you can certainly look at your current investments and estimate what you expect those investments to earn in the future. These estimates will help you determine if a Roth IRA is the right choice for you.

Those workers who already hold a traditional IRA account are free to open a Roth IRA as well; it is perfectly acceptable to hold both a traditional and a Roth IRA. Of course contributions made to the Roth IRA will not be deductible, but the nest egg you build will not be taxable either.

It is also possible to convert a traditional IRA to the Roth version, but doing so will probably trigger a taxable event. That is because those converting from a traditional to a Roth IRA will be required to pay regular income taxes on the capital gains. It is vital for those considering such a move to consult with a tax planner to determine if the move makes sense. The payoff is avoidance of future taxes, but it is important to make sure that the future benefits outweigh the current tax liability.