Things You'll Need:
- Traditional Individual Retirement Account
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Step 1
Determine if you meet the criteria for setting up a traditional IRA. You qualify to set up and make contributions to a traditional IRA if you (or your spouse if you are married and file a joint return) received taxable compensation during the year, and you were not age 70 1/2 by the end of the year. If both you and your spouse have compensation and are age 70 1/2, both of you can set up a traditional IRA.
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Step 2
Check your eligibility for taking a deduction for contributing to a traditional IRA. For 2008, if your modified adjusted gross income (AGI) is $169,000 or more, you cannot take a deduction for contributions to a traditional IRA. If you are not covered by a retirement plan at work and you live with or file a joint return with your spouse who is covered by a retirement plan at work, your deduction is phased out if your AGI is more than $159,000 but less than $169,000. If you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced if your AGI is more than $83,000 but less than $103,000 for a married couple filing a joint return or a qualifying widow(er); more than $52,000 but less than $62,000 for a single individual or head of household; or less than $10,000 for a married person filing a separate return.
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Step 3
Set up a traditional IRA account. Your traditional IRA can be either an Individual Retirement Account or an annuity. It can be part of a simplied employee pension (SEP) or an employer or employee association trust account. Traditional IRAs can be set up with banks, stock brokers, mutual fund companies, life insurance companies or other financial institutions. Research the options available to you. Select the option that will benefit you most.
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Step 4
Choose your investment vehicles. Research the investment vehicles available to you. Make the investment choices that will benefit you most. Take into consideration risks, returns, fees and the accessibility of your funds.
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Step 5
Contribute the maximum amount you can afford to your traditional IRA. The general limit for contributions to traditional IRAs is the smaller of $4,000 ($5,000 if you are 50 or older) or your taxable compensation for the year. The general limit may be increased to $7,000 if you participated in a 401(k) plan offered by a company that filed bankruptcy in a prior year. Consult IRS Publication 590 for more information.
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Step 6
Take the maximum IRA deduction you qualify for on your tax return. The IRA deduction reduces your taxable income. If you are married and neither you or your spouse was covered by an employer retirement plan during the year, you make deduct your total IRA contributions up to the lesser of $4,000 ($5,000 if you are age 50 or older) or 100% of your compensation. This limit may be increased to $7,000 if you participated in a 401(k) plan offered by an employer who went into bankruptcy in a prior year. Refer to IRS Publication 590 for additional information and scenarios.
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Step 7
Take advantage of the Saver's Credit. You may qualify to take a Saver's Credit that reduces the amount of income tax you owe dollar for dollar. You can take the Saver's Credit if your AGI is no more than $26,500 if you are a single filer ($39,750 if you are head of household and $53,000 if you are married and filing a joint return), you were born before January 2, 1990, you were not a full-time student and no one else claims and exemption for you on their return. You may be eligible to take a credit of up to $1,000 ($2,000 if married and filing a joint return).
