The Power of Tax-Deferred Savings

However, if you're like most people who go to work every day or toil at your own business, you should be eligible. (For those who are self-employed in a business with no other employees, I have found that the self-employed 401(k) is a better option.) By the way, husbands and wives can each have their own IRA even if only one has earned income.

The other limitations to IRA contributions relate to income level and whether the participants are already covered by a retirement plan at work. There is no income restriction on deductible contributions to a traditional IRA if neither husband nor wife is covered by a plan at work. However, you can't contribute to a Roth IRA if your joint income exceeds $160,000, and traditional IRA contributions are not deductible for plan participants if joint income exceeds $85,000, and are not deductible for spouses of plan participants if joint income exceeds $160,000.

Nondeductible contributions to traditional IRAs can still be made at any income level, though. Those nondeductible contributions will still grow tax-free until withdrawals commence, at which time there is a formula for deciding how much of any withdrawal is taxable. Speaking of formulas, the details of all aspects relating to IRAs are available in IRS Publication 590. If your situation is complex, IRS publications or a good tax adviser are other places to look for answers.

For tax year 2006, total IRA contributions are limited to $4,000 per person (or $5,000 per person if age 50 or more). If your earned income is below the appropriate threshold, then this earned income would be the limit for any IRA contribution. IRA contributions can be made to traditional IRAs or Roth IRAs in any combination up to the total contribution limit.

Coming up: Part 2 will look at the differences between traditional and Roth IRAs and the possibility of converting a traditional IRA into a Roth IRA.