Tax Considerations

• Depending on your income and filing status, your money goes into a traditional IRA before it is taxed. This will lower your current tax bill. Through the years, your money can grow tax-free until you pull it out. Then you will have to pay taxes on your withdrawal. You contribute money to a Roth IRA after it has been taxed. You will not save on taxes today. However, your money will grow tax-free. Your qualified distributions during retirement will not be subject to income tax.
  
  

Income Limits

• Anyone who has earned income can establish a Vanguard traditional IRA. There are income limits, however, for those who want to open a Roth IRA. IRS.gov advises that your adjusted gross income must be less than $176,000 for a married couple filing a joint return, or $120,000 for a single head of household.
  
  

Contribution Limits

• Although anyone can contribute to a traditional IRA, limits apply to the tax-deductible amount. The IRS specifies that a contributor younger than 50 years old can contribute the smaller amount of $5,000 or the amount of earnings for 2011. If you are older than 50, the limit is $6,000. You can contribute to either a traditional or a Roth account, or a combination of the two. If you are married and file a joint return, your allowed contribution decreases if your adjusted gross income climbs over $169,000. Vanguard lists $3,000 as the minimum initial contribution for an IRA. However, they offer STAR, a balanced fund that accepts an initial investment of only $1,000. Once the account is open, you may add contributions as you see fit.
  
  

Minimum Distributions

• The IRS requires a withdrawal each year, from traditional IRA accounts, beginning at the age of 70-1/2. These withdrawals are subject to taxation. The Internal Revenue Service specifies the percentage of your funds to be withdrawn at each age. Vanguard will help you determine the amount that applies to you. If you do not withdraw sufficient funds, the IRS will charge a 50 percent penalty. The Roth IRA does not require distributions unless you want them. If you are over 59-1/2 and have held the account for at least five years, you can withdraw your money tax-free at anytime.