You've probably heard from a young age that it's never too early to save for retirement. And maybe now you've made enough money to actually comfortably put some away. Congratulations! But where do you start?

One option is an individual retirement account or IRA. If you're looking for a way to save up for retirement and you don't have a 401(k), an IRA may be the right choice for you.

There's a lot to know about IRAs before you even think about getting started. How much can you put in an IRA? What happens when you take money out of it? Where is that money even going? And what type do you even qualify for?

Let's start with the basics.

What Is an IRA?

An individual retirement account (IRA) is an account made for the express purpose of saving money for retirement. A tax-deferred savings account, the IRA has been in existence since 1974, when Congress passed the Employee Retirement Income Security Act (ERISA) with the intention of encouraging people to save for retirement.

If you don't have a 401(k) or are not offered one at your job, setting up an IRA could be the next best thing. You're much more limited in how much you can put into an IRA, but what you can do with it is far more varied than with a 401(k) or a 403(b).

An IRA can be set up at nearly any major financial institution - banks, insurance companies, mutual fund companies, brokerages and more, though the type of IRA you get may dictate where it is set up.

Most IRA contributions are tax deductible, provided you meet certain conditions (the exception is a Roth IRA.) When an IRA is tax-deferred, the tax on the contribution and investment growth is not paid until funds are withdrawn. 

An IRA is designed as retirement savings, but unforeseen emergencies may force people to have to withdraw money from it before retirement. Early withdrawals, (a withdrawal before the age of 59 ½) can be subject to a 10% tax penalty.

There are exceptions to this. If you have to withdraw from your IRA to cover medical expenses not covered by your health insurance that exceed 7.5% of your adjusted gross income (AGI), you will not be subject to the penalty. If you are found to have a physical or mental disability that impairs your ability to gain consistent employment, you are also able to withdraw from your IRA without the distributions being penalized.

What Is in an IRA Account?

The money you put into your IRA is saved in that account, and you can choose how to invest it.

An IRA can be a little confusing at first glance, as it can be both savings and/or investment portfolio.  An IRA usually gives you far more investment opportunities than an employee-sponsored 401(k) does.

Investing in stocks, bonds, mutual funds, index funds and ETFs is allowed and common for IRAs, as for any investment portfolio. Real estate investments are also permitted for IRAs - but only if it's used solely as an investment, and not a property you live in or make rental income from.

This gives you quite a bit of freedom with how your IRA funds are invested. Treat it the way you would treat any other investment portfolio. Determine where you want to put your money, what your risk tolerance is and how you want to diversify. Investing in stocks, long-term, has shown itself to be the most likely way to make additional money from investments.

Types of IRAs

What type of IRA do you want? That depends on what is even available to you, but also where you want your IRA set up and whether your employer is able to offer one.

Here are the most well-known types of IRAs.

Traditional IRA

The traditional IRA is named as such generally to differentiate it from a Roth IRA (we'll get to those further down).

There is no minimum amount of yearly income required to set up a traditional IRA, and as mentioned, your contributions are tax-deferred until distributed. While you're generally limited to $6,000 in contributions, if you're 50 or older you get an extra $1,000 added to your limit as a "catch up."

You can also deduct contributions on your taxes depending on your income. Once you reach a certain income you're no longer able to fully deduct the contribution, and the amount you can deduct gets smaller and smaller until you reach a certain yearly income (for 2019, $123,000) and you're no longer eligible for any deduction.

Once you reach the age of 70½, you are no longer able to contribute to your traditional IRA, and are required to start taking out minimum distributions.

SIMPLE IRA

Small businesses who aren't able to offer a 401(k) may offer their employees a SIMPLE IRA.

To qualify for a SIMPLE IRA, your employer can't have more than 100 employees making at least $5,000 a year. You, as the employee, also need to have made that much for at least two years with reason to believe you will continue making that much to qualify for the account.

A SIMPLE IRA has the same 10% penalty tax as a traditional IRA if you take out any distributions before 59 ½, but if you have to within the first two years of having the account that penalty increases to 25%.

Learn more about SIMPLE IRAs with our helpful guide here.

SEP IRA

The SEP in SEP IRA stands for "simplified employee pension." SEP IRAs are designed for the self-employed or small business owners.

Rather than a set contribution limit, a SEP IRA allows you to contribute up to a certain percentage of your income each year (since you're contributing to it as an employer, not an employee). You'll need to have been working in this regard for this company for at least three of the last five years and have made at least $600 in the past year.

Because your contributions are as the employer and not as an employee of the business you own, the contributions to your SEP IRA are subtracted from your business's net income.

Learn more about SEP IRAs with our helpful guide here.

Roth IRA

Traditional IRAs and Roth IRAs are likely the two you've heard most about. What is a Roth IRA and how is it different from a traditional one?

A Roth IRA has no minimum contribution, and has the same annual contribution limits ($6,000, or $7,000 if you're 50 or older.) But whereas traditional IRA contributions are made pre-tax, Roth IRA contributions are after-tax. This means your contributions are not tax deductible, but it also means that your withdrawals are tax-free. You're also not subject to tax penalties if you withdraw prior to retirement.

Once you reach retirement age with a Roth IRA, there are no minimum required distributions, and if you're still earning income you are allowed to continue contributing to it.

Learn more about Roth IRAs with our helpful guide here.

Rollover IRA

A rollover IRA is a very specific version. You aren't contributing to your rollover IRA; rather, you've created it so that you can rollover the contributions from an employer-sponsored account like a 401(k) or a 403(b), usually after you leave that employer.

In rolling over your 401(k) into an IRA, not only do you keep the tax-deferred nature of your contributions (at least with a traditional IRA), but you now have more flexibility with what you do with those contributions. IRA investment options are more wide-ranging than most employer-sponsored retirement accounts, and now what you do with them is in your hands.

IRA Contribution Limits

The amount you're able to contribute to an IRA is dependent on the kind you have, though some are the same. These are the contribution limits for 2019:

Type of Account

Contribution Limit

Over-50 Limit

Traditional IRA

$6,000

$7,000

Roth IRA

$6,000

$7,000

SIMPLE IRA

$13,000

$16,000

The SIMPLE IRA limit is significantly higher than that of a traditional or Roth, likely because contributions to your SIMPLE IRA come from your salary.

If you have a SEP IRA, you or your employer cannot contribute more than 25% of compensation up to $56,000.

IRA Deduction Limits

The tax deduction you can get with your IRA is based both on the IRA you have and the income you make. If you have a Roth IRA or a SIMPLE IRA (if you're an employee), it's pretty simple: you can't deduct any of it.

If you have a traditional IRA, it will also depend on whether or not you are covered by a retirement plan at work. If you're not, the limits are as follows:

  • If you are filing your taxes as single, head of household or a qualified widower, you can fully deduct up to the contribution limits.
  • If you are married filing jointly or separately and your spouse is also not covered by a retirement plan at work, you can fully deduct up to the contribution limits.
  • If you are married filing separately and your spouse IS covered by a retirement plan at work, you can get a partial deduction if your modified adjusted gross income (MAGI) is under $10,000, and you cannot deduct if your MAGI is $10,000 or more.
  • If you are married filing jointly and your spouse IS covered by a retirement plan at work, you can fully deduct up to the contribution limits if your MAGI is under $193,000. If your MAGI is between $193,000-$202,999, you can make a partial deduction that decreases the more your MAGI is. You cannot deduct if your MAGI is $203,000 or more.

If you ARE covered by a retirement plan at work, here are the deduction limits:

  • If you are single or head of household, you can fully deduct up to the contribution limits if your MAGI is under $64,000. If your MAGI is between $64,000-$73,999, you can make a partial deduction that decreases the more your MAGI is. You cannot deduct if your MAGI is $74,000 or more.
  • If you are married filing separately, you can get a partial deduction if your modified adjusted gross income (MAGI) is under $10,000, and you cannot deduct if your MAGI is $10,000 or more.
  • If you are married filing jointly, you can fully deduct up to the contribution limits if your MAGI is under $103,000. If your MAGI is between $103,000-$122,999, you can make a partial deduction that decreases the more your MAGI is. You cannot deduct if your MAGI is $123,000 or more.

It's never too late - or too early - to plan and invest for the retirement you deserve. Get more information and a free trial subscription toTheStreet's Retirement Dailyto learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? We've got answers.