Rules for Starting an IRA

You can contribute to an IRA if you are under age 70 1/2 and if you have earned income. If you are married and file a joint return, only one of you needs earned income to qualify. For 2012, contributions are limited to the greater of your amount of earned income or $5,000. If you and your spouse earn a combined $10,000, you can each contribute $5,000 to an IRA. Once you reach age 50, the IRS allows an additional $1,000 catch-up contribution per spouse.

One of the main reasons to contribute to an IRA is to get a tax deduction. If neither you nor your spouse is covered by a retirement plan by your employers, you can deduct the full amount of your traditional IRA contributions. If either of you are covered by a plan, your income determines your contribution deductibility. Couples filing joint taxes with a modified adjusted gross income of $169,000 or less can fully deduct contributions, as of the time of publication. A MAGI of $179,000 or higher results in no deduction, with a partial deduction allowed for MAGIs between $169,000 and $179,000.

Once you start an IRA, you shouldn't plan on tapping the money until you near retirement age. Money withdrawn from an IRA before age 59 1/2 will cost you a 10 percent early withdrawal penalty. Additionally, money taken out at any time is subject to ordinary income tax.

A Roth IRA shares the contribution limits of a traditional IRA, but does not grant a tax deduction on contributions. Instead, you get to enjoy tax-free distributions. The 10 percent early withdrawal penalty still applies on distributions before age 59 1/2. You can open a SEP-IRA if you run your own business, whether or not you have employees. A SEP-IRA provides a tax deduction on contributions and has a higher contribution limit. As of 2012, you can contribute the lesser of 25 percent of your compensation of $50,000. However, if you have employees you must contribute to the accounts of those who qualify to participate.