If you’ve heard of IRAs, you probably know they’re a good way to invest for retirement. But if you’re like most people, you’re fuzzy about exactly how they function and how you can use one to your advantage. One recent survey found that only about one in three Americans has an IRA, and 56 percent of Americans say they don’t understand the potential tax benefits the different types of IRAs offer. We’ve got the 101 right here.

What Is an IRA?

An individual retirement account (IRA) is a tax-advantaged retirement savings vehicle. IRAs were introduced by Congress in 1974 to help incentivize people to sock away money for their golden years. Issued by a financial institution, and typically opened through a broker, IRA investments can include stocks, bonds, ETFs, index funds and mutual funds. The accounts generally grow tax free—meaning the government doesn’t recoup a percentage of annual dividends or capital gains, the way it would with a standard brokerage account. That means your investments can earn more money, faster.

Who Should Get an IRA?

If you have an employer-sponsored retirement plan like a 401(k), it’s generally a smart idea to first contribute enough money to it to get the full match from your employer. Once you reach that sum—or if your workplace doesn’t offer a 401(k)—an IRA can be an easy, effective way to give your nest egg a boost.

There are several types of IRAs, each structured a bit differently. The most popular are traditional, Roth, and SEP. (Acorns offers all three types of IRAs, in addition to a regular brokerage account.)

Let’s break it down.

What is a Traditional IRA?

A traditional IRA is tax-deferred, meaning you don’t pay income tax on the money you put in until you withdraw funds. You can contribute up to $6,000 of your post-tax income, regardless of salary. (Bump that up to $7,000 if you’re 50 or older.)

Traditional IRA contributions can be tax deductible, if you meet certain criteria. If you or your spouse also participate in a company-based retirement plan, such as a 401(k), the amount of IRA contributions you can deduct depends on how much you earn. If you make more than the IRS-designated limit, you’re not eligible for any tax deductions.

Here’s how the numbers play out. Single people who bring home less than $64,000 can make the full tax-deductible contribution. You will receive a partial deduction, commensurate with salary, if you earn up to $74,000.

Married and filing jointly? If you have an employer-sponsored retirement plan and take in less than $103,000, you are eligible for the entire tax-free contribution; you’ll get a partial deduction up to $123,000 in earnings.

If only your spouse has a workplace plan, you can score a full deduction as long as your salary is under $193,000, and a partial deduction if you earn up to $203,000. Phew!

The next major distinction of a traditional IRA is that once you reach age 59½, you can start taking money out of your account. Upon withdrawal, that cash is taxed at the current income tax rate.

Since the whole point is to seed financial stability in your later years, there’s a 10 percent penalty for removing funds early. (That fee can be waived in certain circumstances—such as using the money to pay for college or to purchase a first home, or if you become disabled.)

Beginning at 70½ years old, you can no longer contribute to the account; rather, you are obligated to begin extracting funds. Called required minimum distributions (or RMD), the amount you must take out is calculated based on your life expectancy, among other factors.

What is a Roth IRA?

Roth IRAs were rolled out in 1997 as part of the Taxpayer Relief Act, sponsored by Senator William Roth of Delaware. They provide no tax break for contributions, but earnings and withdrawals are generally tax-free. Your income determines how much you can put in the account and whether you can open one up in the first place.

Single taxpayers earning less than $122,000 can contribute up to $6,000—or $7,000 if you’re 50 or over. If you earn between $122,000 and $136,999, you can make a partial contribution, proportionate to salary. If your income tops $137,000, you’re not eligible to contribute.

Married people filing jointly can put in the full $6,000 (or $7,000, if you’re 50 or over) as long as you bring home less than $193,000 combined, and can make a limited contribution if your pay is $193,000 to $202,999. Above that threshold, you’re not eligible.

With a Roth IRA, you can keep making contributions as long as you earn a salary, regardless of how old you are. And you can withdraw the money you’ve contributed at anytime, penalty-free. If you’ve had the account for at least five years, you may also be able to withdraw money you earned before age 59½ without paying a penalty if it goes toward qualified uses like a first-time home purchase (up to $10,000). If you haven’t hit the five-year mark, you will be fined 10 percent plus taxes for extracting earnings early. There is also no RMD during the owner’s lifetime—the money can remain in the account, growing tax-free, and then be passed down to your heirs.

What is a SEP IRA?

If you’re self-employed or a small business owner, a Simplified Employee Pension (SEP) IRA lets you contribute up to 25 percent of your earnings, maxing out at $56,000.

Aside from having a higher contribution limit, a SEP IRA is similar to a traditional IRA. The money is not taxed until you withdraw it, you’re fined 10 percent for removing funds prior to age 59½ and there is an RMD beginning at 70½.

Good to know: If you are a business owner, you must make proportional contributions for eligible employees (generally, those over 21 who have worked for your business in at least three of the last five years).

Which Type of IRA Is Right for You?

First, figure out what you’re eligible for, based on your income bracket and whether or not you or your spouse participates in an employer-sponsored retirement plan, as described in the sections above. If you’re self-employed and would like to kick in more than $6,000, a SEP IRA may be your best bet.

Once you know your options, consider whether you’d rather pay tax on your investments upfront, as with a Roth IRA, or upon withdrawal, like a traditional or SEP IRA. If you think you may be in a higher tax bracket when you tap those funds compared to now, you might opt for a Roth. Also, the current tax rate is at a historic low.

Roth IRAs are also attractive to many investors as you can extract contributions at any age, penalty-free, and continue adding to the account and there is no RMD.

How Do I Set Up an IRA?

The process is similar to opening any other type of investment account. You can go through a brick and mortar bank or an online financial institution. (Acorns offers IRAs as well as a regular brokerage account.)

Your asset allocation will depend on your age, financial goals, and risk tolerance.

While 401(k) accounts typically have a limited menu of investment options to select from, you can be more hands on with an IRA, either self-directing your portfolio selection or leaving it up to your broker to call the shots on your behalf. (Acorns recommends a diverse portfolio for you.)

Either way, the sooner you jump on an IRA, the more flush your reserves will be when you reach retirement.

Investing involves risk including loss of principal. This information is presented for educational purposes only and is not a recommendation to buy or sell a specific security or engage in a particular strategy. Acorns does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.