When stepping into the exciting and yet scary world of investing, one of the first things you need to understand is the difference between the three main structures you can use. The reason this is so important is because it affects your money NOW and in RETIREMENT.

Even though there are many different ways to invest, the three main structures you can use to get involved in the market are

1. Regular Investment Accounts
2. Traditional IRAs
3. Roth IRAs

The structure you choose does not directly determine whether you invest in stocks, bonds, mutual funds, etc... but the main differences between these different structures have to do with TAX, TIME, and AMOUNT. I refer to them as "structures" because just like the framework of a building determines what the building will look like later on, your investment structure will determine what your portfolio looks like later on. Choosing the wrong structure for the wrong purpose could mean that your money does not grow and benefit you as much as it could have with the correct structure.

Break-down of the three different account structures:

1. Regular Investment Accounts:

Regular investment accounts are, well... regular. There's really no other way to put it. There are not many benefits or restrictions, you're just trying to make your money grow. These accounts are great for trying to earn a living through investing, and investing for short-term gains, like saving for a car or home.

TAX: There are not any particular tax benefits with regular investments.You will pay taxes on the money you earn before you invest it, and then you will pay taxes on the money you earn from the investments.

TIME: You can cash out your investments at any time without penalties. As mentioned, this account is usually better for short(er)-term investing.

AMOUNT: There is no limit to how much you can put it and how much you can take out.

Traditional IRAs:

Traditional IRAs are mainly used for reaching retirement goals.

TAX: Depending on your income level, you will be able to deduct all of the contributions to your account from your taxes every year. Also, you do not have to pay taxes on your earnings until you withdraw your earnings out of the account. This helps your money to grow faster than a regular investment because you keep more in it.

Example: If you are in a 30% tax bracket and invest $10,000 in a regular account, you would have already paid $3,000 in taxes on that $10,000. Then, if your money grows 10% that year, you will have earned $1,000, but have to pay $300 in taxes on your earnings. Your money minus your taxes will be $7,700.

But, if you invest $10,000 in a traditional IRA, you will not have to pay taxes on that amount which would leave an extra $3000 in your pocket. Then, if you money grows 10% that year, you will not have to pay taxes on the $1,000 you earned. This allows you the option of adding the $300 back into your account in order to help it grow faster. Therefore, your money will be at $14,300 rather than the $7,700 in the regular account.

Keep in mind that you will still have to pay taxes on your entire account (earnings and contributions) when you retire. If your acccount is worth $100,000 and taxes are still at 30% for you, you will pay $30,000 when you withdraw your money.

TIME: You will pay a 10% penalty if you withdraw your money before the age of 59 1/2. However, there are several exemptions to the 10% penalty rule which I will explain later on.

AMOUNT: Everyone is eligible, no matter what your income level, but there is a maximum amount of money you can contribute annually. The current limit of 2010 is $5,000 unless you are over the age of 50, which gives you the limit of $6,000 in order to catch up. However, there is talk of this being raised in the next few years to come.

Roth IRAs:

Like traditional IRAs, Roth IRAs are also designed to help reach your retirement goals.

TAX: Your contributions are not tax deductible like they are with a traditional IRA, but you do not have to pay taxes on any of your investment earnings when you withdraw it at retirement. This is a huge advantage when taxes are at 30% to 40% (you never know what they might be when you retire. The chances of taxes being less than they are now when you retire are slim to none because of the rising national debt and inflation, which is just around the corner. But, you really never know.)

TIME: You can withdraw your principal amount from the account any time you want. The only time you will be charged a penalty for withdrawing money before the age of 59 1/2 is if it is from your earnings. For instance, if you make a one-time investment of $10,000 into your Roth IRA and your investment earns an additional $3000 over the course of three years, you could withdraw $10,000 penalty-free. But if you withdraw anything over $10,000, you will pay a penalty.

AMOUNT: Currently, the maximum contribution you can make to your Roth IRA per year is $5,000, unless you are over the age of 50 and then it is $6,000. This could change in the years to come. There used to be a cap on who was eligible for Roth IRA depending on your income level. This has been recently lifted. Married couples have the advantage because they can each have a Roth IRA which increases their maximum contributions to $10,000 rather than just $5,000.

So which investment structure should you choose?

This decision is up to you. I'm just here to provide you with the facts. If you want to have someone tell you what to do then consult a certified Financial Advisor. It is obvious that if you are planning for retirement, you will probably want to go with an IRA. But then the question is, which one? There are big advantages to both types of IRAs, but you need to decide what factors are more important to you.

When making this decision, ask yourself these questions:

• Am I in need of extra tax breaks right now?
• What is the media saying about inflation and taxes? (Take the media's info with a grain of salt, of course)
• What are my investment goals? Which account will help meet those the best?
• How much money can I come up with at the end of the year to invest with?

If you want to know how I invest, read this: My investment strategy. Stay tuned for Part #3 in the "Understanding Investments" Series: The 401K.

What investment structure is most appealing to you? What other questions do you have about the three main investment structures?