Step 1

Decide whether you want a Roth or traditional IRA. If you select a traditional IRA, you tax-deduct your contribution, but you must begin to take funds when you're 70 1/2 and when you remove money, all of it is taxable. Unlike the traditional, the Roth has no required minimum distribution at 701/2, and you pay no taxes on the money when you take it out. However, if you remove funds from either before you are 70 1/2, expect taxes and a 10 percent penalty. You can have both kinds of IRAs, but your total investment can't be more than your limit if you only had one.

Step 2

Find out if you qualify before you start anything. If you don't have a retirement plan at work, and want to start a traditional IRA, there's obviously no problem. But for singles who do have a retirement plan, and want a traditional IRA, income needs to be below $65,000 for a partial deduction, and below $55,000 for a full deduction. If you're married filing jointly, you can invest the full amount in a traditional IRA until your joint income reaches $89,000, and then the amount phases out at $109,000. If only one spouse has a retirement plan, the income limits for the other spouse push up to $166,000, and end at $176,000 for the year 2010. If you're married filing separately, and either spouse has a retirement plan, the upper income limit is $10,000 for a partial deduction.

Step 3

Consider a Roth if your income is too high. The income limitations on a Roth IRA for a single person start at $105,000, and phase out at $120,000, for the year 2010. For married filing jointly, phase out starts at $166,000, and ends at $176,000. Just like the traditional, if you're married filing separately, you can't make over $10,000.

Step 4

Select the type of investment you want. The designation IRA is simply a paper stating your investment is for retirement. The investment can be of almost any type. However, you can't use collectibles or life insurance. If you want a mutual fund as the investment, find a mutual fund company or representative, and fill out the paperwork. Bank products can be IRAs; so can annuities. Call up or visit your bank or insurance company to find a product you want or just speak with a professional. It's like opening any other account, but with a few more papers.

Step 5

Subtract the IRA from your taxable income if it's a traditional plan, and don't forget to take a Retirement Savings Contributions Credit. This is in addition to the tax savings from a traditional IRA, and is also for people with a Roth. Your income must be under $27,750 if you're single, $41,625 for filing status head of household, or $55,000 for married filing jointly.