by Bill Whitney

Created on: January 09, 2008   Last Updated: March 14, 2009

Setting up an IRA need not be that big a deal. It just takes a little time to research the various types of IRAs. THe rules governing contributions and tax ramifications. Which one is best for you depends on so many things. The easiest way to figure it all out is probably to dicuss it with your CPA or tax adviser.

There are for types of IRAs. There is the Traditional IRAs. Roth IRAs, SEP and the SIMPLE. The SEP is geared for the self employed and the SIMPLE is for small companies with not very many employees. The Traditional and the Roth are for individual investors. The SEP and the SIMPLE have different requirements

Depending on your needs and your age, you have to decide if you want to go with Traditional or a Roth IRA. There are advantages and disadvantages to both. The one common denominator is that the money has to be from earned wages. Interest, dividends, Social security and unemployment are not considered earned income. I found out this year the hard way. I had to make some money out of a traditional for 2008 and put it toward 2009 because I didn't have enough EARNED income.

The traditional IRA has the advantage of being deductible from your gross income for tax purposes which sometimes gets you a refund or lessens what you have to pay. But when you cash it at the age 59 1/2 or older you have to pay taxes on it. Once you reach the age of 70 you can't invest in Traditional IRA anymore. For 2008 and 2009 the maximum investment allowed is $5500 up to age of 50 and $6000 if you are over 50. Again that has to be earned income from an actual job.

The Roth IRA has the same investment limits but you can't deduct the amount from your income tax. The money and the interest is not taxed when you cash it and you can invest in a Roth as long as you live. An easy way to remember is that the traditional contributions are tax deductible and th distributions are taxable. The Roth IRA contributions are not deductible and distributions are not taxable.

Once you decide which IRA is best for you, then you have to pick a financial institution or brokerage firm that you want to trust your hard earned money to. If you are young you might want to go with some mutual funds with Vanguard or some other reputable company. If you are older and nearing retirement you might want to go with a bank or credit union the is insured by FDIC or FCULA. It is backed by our government that is now close to 4 trillion dollars in debt. After seeing what has happened to my retirement funds since last November 4th I wish I would have had it all in CD IRAS at the credit union. I would be $150,00 better off. Some positive is better than positive 100 one day and negative of the stock market. If you have time to wait you will probably make more in stocks and mutual funds. I have some of both.

Once you get your IRA open and going you need to monitor every month and see how it is doing. Longer term CD IRAS pay better interest and are a way to go if you don't think you'll need the money. According to Suze Orman, you should put money in a five year IRA for five years in a row, then you will have one come up for renewal every year and if you need money and you can get it. If you don't need it, add to it and go for another five years. Just keep doing the same thing over and oer every year.

I use Vanguard because they have the lowest fees and generally do well. None of them are doing very good right now.

Learn more about this author, Bill Whitney.
Click here to send this author comments or questions.