Open Your First IRA

This article was updated in 2008.

Maybe the choices in your employer's retirement plan are lousy. Maybe you need another tax break or want to reduce your tax burden in retirement. Maybe you've maxed out your 401(k) and still want or need to save more. If so, open an IRA.

Anyone who's younger than 70 1/2 and has earned income can open an individual retirement account. While the age limit does apply to traditional IRAs, it does not apply to Roths. Even your kids can open an IRA as long as they're earning money. And while starting an IRA isn't child's play -- you'll want to compare fees, expenses and investment performance -- it isn't that tough, either.

Types of IRAs

Basically, you have two types of IRAs to choose from: Roth and traditional. Which one you choose depends on how much you make now and your tax bracket in retirement. If your adjusted gross income (AGI) is less than $116,000 ($169,000 for couples filing jointly) and you'll be in a higher tax bracket in retirement, then consider a Roth IRA. Your contributions aren't deductible, but you'll be able to withdraw your nest egg tax-free.

If you think your tax rate will decline in retirement, then consider a traditional IRA. You can deduct your contributions today, but you'll pay taxes on the money when it's withdrawn. However, the deduction fades away above certain income levels if you're eligible to participate in your employer's retirement plan.

The contribution limit for both Roth and traditional IRAs is $5,000 ($6,000 if you're 50 or older) this year.

Where to start

Not sure where to put the money? Don't let that be an excuse for not opening an account. While you're hemming and hawing over where to invest, your money could be earning interest. Even if you start with a low-interest money market fund, you can switch to more lucrative investments later. The important thing is not to delay.

You have three main options when it comes to opening an IRA: a bank, a brokerage or mutual fund company. And you can invest in any kind of security -- stocks, bonds, mutual funds, etc.

A bank might work well if you can't decide where to put your money. It also can be a good choice if you don't have much to invest. You often can open an account for as little as $100. Most let you invest in CDs or money market accounts, sometimes without an annual fee. Check Bankrate.com for average rates.

For rookie IRA investors, mutual funds are probably the simplest option -- you can leave the stock picking to the pros and spread your money and your risk instantly across a large number of investments. Look for a mutual fund company with a broad choice of funds. You may start with just a single fund, but as your IRA grows, you'll want to split it up into a number of funds with different investment styles.