How to Set up an Ira

An IRA is an acronym for Individual Retirement Account. An IRA allows individuals to put aside a lump sum of money each year to be used later, when one retires. Here’s the important point to note: Monies invested in your IRA grow tax DEFERRED, not tax-free. Once you “fund” your IRA for the year, you write-off that same amount from your income, effectively making the IRA contribution “pre-tax” money. This accomplishes two things:

1. Your investment in your IRA lowers your income, thereby lowering your tax-bite.
2. You’ve now begun an investment account that you do not have to pay capital gains tax or income tax on each year as it grows.

There is a catch; you will have to pay taxes on the monies when you utilize it at retirement time. At that point, when you withdraw money from the account, the money becomes REGULAR INCOME. The thinking here is that, when you retire, you will be in a lower tax bracket. This is not always the case, but in general, your income will probably be somewhat less when you retire.


Almost anyone can set up an IRA. It is a simple process that we will discuss later.
There are some things that are important to know, however, regarding IRAs. Making mistakes in funding your IRA can end up costing you money.

1. In General, almost any individual under the age of 70 can set up and contribute to an IRA. However, the contribution may or may not be tax deductible. Your individual circumstances regarding income and tax-filing status as well as if you are part of an employer-sponsored plan, may affect the deductibility of your IRA contribution.

For example, if you are part of an employer-sponsored plan such as a 401(k), the IRA money that you invest each year is NOT tax deductible. Even if you are not participating in your company’s 401(k), but you are ELIGIBLE to participate, your IRA contribution each year is not tax deductible. So, be careful; you could put yourself into a situation where you have paid tax on the IRA money as you invest it, then, pay taxes again when you withdraw the money down the road. You are in effect, paying taxes twice on the same money, in that case.

2. Check the details. Be sure that you are eligible to utilize an IRA with respect to other limitations. For detailed information regarding IRA eligibility, see the article by the U.S. Treasury at:,id=111413,00.html. Your specific situation may not apply to the general rules. Get answers to the questions that are appropriate to your unique situation before you set up and fund your IRA.

3. Once you have set up your IRA, you can fund it until April 15th of the following year. You still have time to fund your IRA for 2007, for example, until April 15th of this year, 2008. If you have procrastinated in planning for retirement, you can begin now and contribute for 2007.

4. Make the most of your IRA by contributing as much as you can. Take advantage of one of the few ways that the U.S. Government allows you to prepare for retirement.

* Remember the entire point of an IRA is to get as much money as you can OUT of your taxable income and INTO a tax deferred retirement account. If your contribution to your IRA is not tax deductible, you are defeating the purpose of the IRA account.


In general, you can contribute $4,000 for 2007 and $5,000 in 2008. There is also a “catch-up” clause for those 50 years of age to 70 1/2. Because so many Americans are unprepared financially for retirement, these individuals are now allowed to contribute an extra $1,000 each year to their IRA, making the contribution $5,000 for ’07 and $6,000 for ’08.

5. Take advantage of an IRA ROLLOVER if you have money sitting in a former employer’s sponsored plan. Once you leave a particular job, your 401(k), SEP Plan, 403(b) or SIMPLE IRA plan should be ROLLED out of your former employer’s plan. Other plans are again, situation specific. Your former employer is responsible to give you the specifics for that company’s plan.

Some group plans are not eligible for rollover. But, if your former plan can be rolled to an IRA, DO IT! By rolling the account, (a simple process,) you have total control of the investments you choose for the account.

Be sure you don’t take a distribution! Very important point! Roll the money directly to an IRA ROLLOVER account. If you take a distribution, you could be liable for taxes and penalties on the money. This could have dire consequences. Beyond the penalties, the distribution could be accounted for as “ordinary income.”

If your former employer does cut you a check, open an IRA ROLLOVER quickly and deposit the money very, very quickly! If it is not deposited within 60 days, it is considered a distribution. Then you could have a real problem. (See the above U.S. Gov. link for more details.)

Let’s say you take the distribution from your 401(k) and you are not yet 59 . The amount accumulated in your former plan is $75,000, for example. If your income for the year that you take the distribution is $50,000, you have just increased your income to $125,000.00. You are now in the $125,000 tax bracket, as well! Ouch! You can avoid these sorts of complications by doing a simple IRA ROLLOVER where the money accumulated stays within the confines of a tax-deferred IRA account; and this is one time that you DO NOT want to DELAY.


You can set up your IRA account yourself by getting the IRA Account Form on line from a brokerage firm such as Fidelity, Vanguard, Charles Schwab, Scott Trade or whomever you may choose. You simply fill out the form and send a check to the account whenever you choose to fund the account. We have already discussed the maximum amount. The minimum to set up and contribute to the account will depend on the firm that you choose.

Charges for the account will differ greatly among firms. It could be anywhere to free or to $100 set up fee and other charges for the yearly Trustee fee. Be wary of “free” as often the set up may be free but there may be lots of other charges that you don’t see until they are deducted from the account! Ask questions. Be clear about what you are paying.

IRA Rollovers are much the same; you simply fill out the IRA set up form (not usually complicated,) and let your former employer know where to transfer the funds from your old employee plan. He’ll need a new account number for your new IRA account, and he will release the funds from your former 401(k) or other sponsored plan, to your new account.

If all of this boggles your mind or you don’t have the time to deal with it, a broker can do it all for you. If you already have a relationship with a broker, you should have already discussed these situations! If not, ask him or her and get the process started. I would also ask why, since she or he is handling your entire financial plan, haven’t you had a conversation about retirement planning.

Your broker shouldn’t just be selling you “stuff,” but should be helping you to pull together all aspects of your investment strategy. As in any profession, some brokers are knowledgeable, reliable professionals and some are just putting in their time. A good broker is worth hiring, especially if you have no clue about investing. But, ask around; who do you know who can prove to you that they have had success with a particular broker? Hire that guy or woman!

A broker can also assist you with your investment choices. To simplify, Stocks, Bonds, Mutual Funds, almost any security can be held in an IRA account. This is the most simple and easy way to begin an IRA. However, lots of other things can be held in an IRA account, including real property. If you are in a position to consider putting other investments into your IRA account, you will need a knowledgeable accountant to assist you. This gets tricky and is beyond the knowledge of most individuals to consider the advantages and disadvantages as well as specifics of holding other investments than securities in your IRA account.

Take advantage of the IRA that best fits your needs; you my want to research a ROTH IRA, as well. ROTHs offer some benefits that IRA’s do not. There are also restrictions that come with a ROTH that may make you ineligible for a ROTH.

It is to your advantage to contribute as much as you can to your IRA. You may even be able to contribute to an account for a non-working spouse if you are filing jointly. Don’t miss these opportunities. The process is simple but if you feel unsure, find a reliable broker to help you.