Rules for Starting an IRA

by Cynthia Myers

Anyone who earns wages and who is younger than 70 ½ can open an Individual Retirement Account, or IRA, to save for retirement. You can deduct the money you put into a traditional IRA from your taxes, reducing your tax bill for the year in which you set aside the money, or open a Roth IRA and withdraw the money later tax-free. You only need to remember a few rules for starting your IRA.

Roth or Traditional?

Both Roth and traditional IRAs offer tax advantages, but these advantages come at different times. With a traditional IRA you defer paying taxes until you withdraw the money after you retire. With a Roth you pay taxes in the year you earn the money, but don't pay any taxes on the money or the account's earnings when you make withdrawals. If you have many years before you retire, a Roth can save you money. If you're closer to retirement age, or want to maximize your tax savings now, choose a traditional IRA. Or you could open one of each.


You can invest the money in your IRA in a mutual fund, stocks or bonds. Almost any bank or investment company will open an IRA for you. Review the information they give and decide how much risk you want to take with your investment. Some IRA funds require minimum investments, and some have fees, or "loads." Decide which investment makes the most sense to you. If you end up dissatisfied with your initial choice, you can always switch later.


Decide how much money you can afford to set aside in your IRA. You can't put more than $5,000 a year into a Roth IRA, or $6,000 if you are age 50 or older. If you have a traditional IRA, you can put as much money into the IRA as you like, up to the total of your wages for the year, but the IRS only allows you to deduct $5,000 from your taxes, or $6,000 if you're 50 or older.

Other Considerations

If you're covered by a retirement plan at work, the tax-deductible amount you can contribute to a traditional IRA may be further reduced. The more you earn, the less your allowable deduction. You can still put money in an IRA, but you'll pay taxes on your contributions. You won't, however, owe more taxes on this money when you withdraw it, though you'll have to keep track of the amount of taxed contributions and the amount of tax-deferred contributions. If you're married and don't have a job, you can still put aside money for retirement in a spousal IRA if your husband or wife is covered by a retirement plan at work.