How to Open an IRA Account

By Kent Ninomiya

  • Overview

    It is simple to open an IRA account, but you must follow all the rules. The Internal Revenue Service has very strict regulations dictating who can open Individual Retirement Accounts, how much they can deposit each tax year, and what they can do with it at a particular age. The IRS inflicts harsh penalties to those in violation of these rules.
    • Step 1

      Decide which type of IRA account you want. There are two major types. A Traditional IRA allows qualified taxpayers to deduct their IRA contribution from their taxes each year. It then defers taxes on the proceeds until retirement when most people are in a lower tax bracket. A Roth IRA does not give you a tax break during the tax year of the contribution, but it allows the account to grow tax free. Redemptions are also tax free during retirement.
    • Step 2

      Figure out if you qualify to open an IRA account. Roth IRAs are only available to taxpayers who make less than a certain amount of Modified Adjusted Gross Income. It is known as MAGI and is calculated on your tax return by taking all your income and subtracting adjustments like business expenses, moving expenses and alimony. That number is then raised by adding things like the self employment tax deduction, education adjustments and rental losses. As of 2008, single people could have a MAGI of no more than $116,000. Married people could have a MAGI no higher than $169,000. The IRS changes these figures periodically, so check with them for the latest limits. (See Resources) If your income rises past the limits in later years you can keep your Roth IRA, but you wont be able to deposit more money in it. Any taxpayer with earned income can open a Traditional IRA.

    • Step 3

      Determine whether you can take a tax deduction when opening an IRA account. Traditional IRAs give tax breaks for IRA contributions to those below certain income limits. As of 2008, single people could have MAGI no higher than $53,000 to take the full deduction. Married people could have MAGI no higher than $85,000. Partial deductions are available to single people with MAGI from $53,000 to $63,000 and married people from $85,000 to $105,000. Roth IRAs do not give tax breaks for contributions.
    • Step 4

      Pick a financial institution to host your IRA. "No load" mutual fund companies like Fidelity, T. Rowe Price and Vanguard are popular choices. They offer a wide range of financial products with low fees. Banks and brokerages can also host IRAs. It is up to you where you open your account. IRA is a tax designation, not an investment type.
    • Step 5

      Contact the financial institution of your choice and tell them you want to open an IRA account. They will give you paperwork to fill out. You must decide what kind of investment you want for your IRA. Those with a lot of time until retirement favor aggressive growth stocks and mutual funds. Those close to retirement age prefer bonds and other conservative investments. Return the paperwork with a check. Contribution limits are capped at a set amount each tax year. As of 2008 it was $5,000 for taxpayers under 50 years old and $6,000 for those older. These limits change periodically, so check with the IRA for the latest limits.
  • Skill: Moderately Easy

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