You can establish a traditional IRA if you're under age 70½ and are earning an income. If you're married and do not work but your spouse does, you may also make a traditional Spousal IRA contribution. Some experts strongly suggest you do this so that if you find yourself on your own, you'll have retirement funds in your own name.
The amount you can contribute to an IRA is considerably smaller than what you can put into a 401(k). However, the annual contribution limits for IRAs are increasing. In 2005, qualified individuals age 49 and under can contribute up to a maximum $4,000. If you're age 50 or older, you can make an additional "catch-up" contribution of $500, which means you can contribute $4,500 for 2005. The catch-up contribution limit increases to $1,000 for 2006, which gives qualified individuals age 50 or older a maximum contribution of $5,000.
When you retire or change jobs, you can roll over a lump sum distribution from your 401(k) funds into a traditional IRA. IRA Rollovers allow your money to continue to grow tax deferred.
If you qualify to deduct your traditional IRA contribution from your current year income, then you get an even bigger tax break than just tax deferral. Whether you qualify or not depends on your income and whether you and/or your spouse are active participants in a retirement savings plan at work.
You can make your traditional IRA contribution for a tax year anytime before the tax-filing due date for that tax year (a filing extension does not extend the contribution deadline). Example: An IRA contribution for the 2005 tax year must be received on or before April 15th, 2006.
If you take the money out of your IRA before you're 59½ years old, you'll not only have to pay ordinary income taxes but may also have to pay a 10% federal tax penalty. There are exceptions to this rule, one of such as buying your first home (limited to $10,000). But you should think twice before dipping into your IRA savings for anything other than retirement.
You must begin taking annual minimum distributions from your traditional IRA at age 70½. The amount you're required to take out at a time is based on the account balance of your IRA and your age. The rules are complex. When you reach this stage, consult a tax advisor.