An individual retirement account (IRA) is a great way to save for retirement, but which type of IRA is right for you? You might know about the standard traditional and Roth types of IRAs, but there might be options more suitable to your situation. In fact, a lesser-known retirement account might fit your needs better.

Which type of IRA is the most appropriate for you? Here are the basics of investing in IRAs and a rundown of your options and what you need to know about them.

What Is an IRA?

If you're saving for retirement, you might use an IRA as your primary vehicle. IRAs come with certain tax advantages, too. Your contributions to your IRA might be tax-deductible, or the withdrawals you take in retirement might be tax-free.

Your IRA also isn't specifically tied to one employer. It stays with you no matter where you work. You can open an IRA through a financial institution and contribute money up to a certain limit and according to specific rules every year.

What's the Benefit of Having an IRA?

The U.S. Congress created the traditional IRA as part of the Employee Retirement Income Security Act in 1974. People use IRAs to save for retirement on their own terms, without relying on their employers to offer them access to accounts such as 401(k)s or 403(b)s. An employer-sponsored retirement account alone might fulfill your retirement savings needs, so supplementing your savings through an IRA can put you on a more financially secure, tax-smart path to retirement.

Having an IRA can also benefit your retirement savings by providing tax advantages when saving for retirement, because your contributions can lower your taxable income.

7 Types of IRAs

1. Traditional IRA

Traditional IRAs let you make tax-deductible contributions now. You pay taxes when you take withdrawals in retirement. You can contribute up to $6,000 per year (or up to your taxable compensation for the year, if it's less than $6,000). If you're over 50, you can also make an extra $1,000 per year in catch-up contributions, for a total of $7,000 per year.

Key features of a traditional IRA include:

• Your contributions are tax-deductible, which lowers your taxable income.
• Your taxes are deferred.
• You can contribute up to $6,000 per year, plus catch-up contributions of up to $1,000 per year if you're over 50.

A traditional IRA could be appropriate if you think you'll see a lower tax rate in retirement, or you don't have access to an employer-sponsored retirement plan.

2. Roth IRA

Roth IRAs work the other way around. With a Roth IRA, you pay taxes on your contributions now; your withdrawals are tax-free.

Key features of a Roth IRA include:

• You can't deduct your contributions, meaning you don't get an upfront tax benefit.
• The withdrawals you take in retirement are tax-free.
• Your annual contribution limit is the same as a traditional IRA, but your contribution could be limited based on your filing status and income.
• The withdrawal rules are more flexible, so you could dip into a Roth IRA to meet your needs before retirement.

A Roth IRA could work best if you think your tax rate will go up in retirement, if you're ready to pay taxes on earnings before investing, or if you might need access to this money before retirement.

3. SEP-IRA

A simplified employee pension IRA (SEP-IRA) works like a traditional IRA, except there's a higher contribution limit and your employer contributes money to the account on your behalf. Earnings grow tax-free, and you pay taxes on distributions in retirement.

Key features of a SEP-IRA include:

• The annual contribution limits are much higher: Either up to $58,000 or 25% of your employee compensation.
• Your employer must contribute an equal percentage to every employee.
• You can't contribute from your salary, and you must have worked for your employer at least three of the previous five years and earned more than $600.
• You can't make catch-up contributions.

A SEP-IRA might work best for you if you're a small business owner looking to avoid the administrative costs of running and operating an employer-sponsored retirement plan. It could also suit you if you're self-employed and able to contribute per the SEP-IRA rules.

4. SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA works like an employer-sponsored 401(k) or 403(b).

Key features of a SIMPLE IRA include:

• The contribution limit is lower than on 401(k) and 403(b) plans — the contribution limit is $13,599 for 2021, versus $19,500 for a 401(k) or a 403(b).
• Generally, your employer must match up to 3% or a fixed contribution of 2% of your pay, so long as you've earned at least $5,000 during any two years before the current calendar year (with expectations for this amount or more in the current year).
• You can use catch-up contributions once you hit 50, and you can roll over a SIMPLE IRA into a traditional IRA after two years.

A SIMPLE IRA could work well if you own a small business or if you're self-employed — but a SEP-IRA might still be the ideal choice because of its higher contribution limit.

5. Spousal IRA

If you're married, you can use a spousal IRA to save for retirement, even if you don't take in much — or any — income. A spousal IRA instead relies on your spouse's earnings.

Key features of a spousal IRA include:

• There are no individual income requirements.
• You must file a joint tax return, and your total combined contributions must be less than your joint reported income.
• The contribution limit is the same as with a traditional or Roth IRA, and you can make catch-up contributions if you're over 50.

Consider a spousal IRA if you or your spouse doesn't work and the other one does, or if one of you doesn't make much money.

6. Nondeductible IRA

A nondeductible IRA is similar to a traditional IRA, except your contributions aren't tax-deductible. You can contribute to a this kind of IRA if you or your spouse have an employer-sponsored retirement plan, and your income exceeds the IRA income limit.

Key features of a nondeductible IRA include:

• Your contributions are taxed, but you can still take advantage of tax-deferred growth and earnings.
• You only pay taxes on earnings growth when you take withdrawals in retirement.

Nondeductible IRAs are best for people who don't qualify to contribute to a traditional or Roth IRA.

7. Self-Directed IRA

A self-directed IRA works like a traditional or Roth IRA, except you can invest in assets beyond the standard stocks, bonds and mutual funds. Self-directed IRAs let you invest in real estate, privately held companies or hard assets, such as gold.

Key features of a self-directed IRA include:

• You must set up the account through a trustee or custodian with experience in the investment.
• You can't hold assets like rare collectibles or life insurance policies in the account.
• You will need to comply with self-dealing transaction rules (for example, you can't borrow money from your IRA or sell property to it).

Look into a self-directed IRA if you'd like to invest in alternative assets for your retirement, or if you're comfortable with the risk.

Whether you're looking to save money on taxes now or in retirement, there's an IRA that's right for you. When combined with other tax-advantaged accounts, IRAs support a number of retirement strategies for a secure future.