by Lana Stockton

Created on: May 01, 2009   Last Updated: January 07, 2010

Setting up an IRA is the easy part. Deciding which type of IRA to invest in may be more complicated. Individual Retirement Arrangements (previously known as Individual Retirement Accounts) can be a good step in planning your future retirement.

Setting up the IRA requires that you fill out a form and make a deposit. Do name a beneficiary on the form. Married persons must add their spouse as beneficiary, unless the spouse signs in agreement, to name another person or non-living entity (organization or trust).

Traditional IRAs

A traditional IRA is the most common, as contributions to traditional IRAs usually are tax deductible. Whether or not you can deduct your contribution depends upon your level of earned income.

You can make a contribution to a Traditional IRA if:

1. Your MAGI (modified adjusted gross income) is under a certain limit. Since IRA laws are constantly changing, the exact limit will not be addressed as it could be adjusted in future tax years. However, a CPA, other tax professional, or bank representative will be able to provide you with current limit information. Individuals and married persons with higher MAGI levels may still be able to contribute to a traditional IRA, but at phase-out contribution levels.

2. The contribution must be from earned income. Passive income, such as royalties, child support and gift money would not qualify.

3. If your spouse has earned income and you do not, you can open an IRA for yourself based upon your spouse's earned income. This previously was referred to as a spousal IRA. Both may have an IRA based upon the working spouse's earned income. Check current IRS regulations as you may need also to file a joint income tax return in order to take advantage of this provision.

4. New contributions can be added until the year in which you reach age 59 1/2. For example: Joe turned 59 years old on January 15th 2009. On July 15, 2009 he will be 70 1/2. So in the year 2009, Joe cannot make an IRA contribution.

His friend, Matt turned 59 years old on July 1st, 2009. Matt will be 59 1/2 on January 1, 2010. Since Matt will be 59 1/2 in 2010, he can still make a contribution in 2009.

The year in which you turn 59 1/2, you may no longer make contributions. This applies only to new contributions, not rollovers or transfers from existing IRAs or qualified plans. For example:

Marcus is 75 years old. Can he open an IRA? Yes, but only for the purpose of having his IRA at a different bank transfered in, or to receive rollover funds from an employer's qualified plan. He cannot add new money. Only existing IRA funds can be deposited into his new IRA.

ROTH IRAs are not tax deductible. The good news is, since you already paid tax on this money, it will be tax-free when withdrawn. Only the accrued interest will be taxed upon withdrawal.

The good news about setting up an IRA account is, you only need to fill out a simple form. If you want rollover funds to be transferred in, the financial representative will get the ball rolling for you, keep in touch with you and follow up on any delays that may occur in getting the funds into your new account.

Do consult a tax professional before deciding which type of IRA is right for you. Now sit back and wait for your bank to take care of getting that money into your new IRA.

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