The Internal Revenue Service has two requirements for setting up an individual retirement account: You must have taxable income, and you must be younger than 70 1/2. You can open a traditional IRA at a bank, savings and loan association, credit union, insurance company or any other institution approved by the IRS.
You can open a traditional IRA in some institutions with as little as $50, or as much as the IRS contribution limit of $5,000 for 2012. You can contribute an extra $1,000 if you are at least 50. And you can double those amounts if you are married, file a joint tax return and your spouse doesn't work or does not have a separate IRA.
Cash or Rollovers
Initial contributions have to be in cash and can't exceed the IRS limits unless they are rollovers. Rollovers are transfers from other types of tax-deferred retirement plans, such as 401(k) programs through an employer. You also can transfer funds from one IRA to another: for instance, if you move and want to relocate your IRA to your new location.
There are restrictions on how much of your traditional IRA contributions can be deducted from your taxable income. Full deductions are allowed for single taxpayers with incomes up to $58,000, and for joint filers up to $173,000. No deductions are allowed for those groups with incomes above $68,000 or $183,000 respectively. Those with incomes between those limits are allowed partial deductions based on an IRS formula.
Taxable income for a traditional IRA includes wages, salaries, tips, bonuses, commissions or any other compensation shown on a W-2 income tax statement of earnings. For self-employed individuals, it is net earnings from the business, minus half of any self-employment tax and contributions on your behalf to a retirement program.
Another form of traditional IRA is a SEP or simplified employee pension. This is set up through an employer, who makes all the contributions. An employer creates the overall SEP, but each employee opens a separate account. Contributions are subject to the same rules as other traditional IRAs and are counted as tax-deferred income for the employee.
Video of the Day
- Ryan McVay/Photodisc/Getty Images