Money Fix: Funding an IRA before tax time

Looking to reduce your 2012 tax bill? You have until April 15 to fund a traditional individual retirement account. Here's what you need to know.

With a traditional IRA, your contribution is tax deductible, subject to certain conditions, and earnings aren't taxed until you make a withdrawal. You get a broad mix of investment options. You can set one up with a bank, stock brokerage firm, mutual fund or life insurance company. The maximum contribution is $5,000; $6,000 if you're 50 or older.

Put in money you can afford to keep there. If you tap your account before age 59½, you pay both tax (at ordinary income tax rates) and a 10 percent penalty. "Have a cash reserve to cover at least three to six months' worth of expenses," says Michael Goodman, CPA, president of Wealthstream Advisors in Syosset. And if you over-contribute to your IRA, you'll get hit with a 6 percent penalty, points out Jonathan Gassman, CPA, of Gassman & Golodny in Manhattan.

If you're not covered by an employer-sponsored retirement plan, contributions are fully deductible regardless of income. But if you or your spouse participate in a plan such as a 401k or 403b, you can contribute to both -- but you may not be able to take a tax deduction on your IRA contributions, says Goodman.

Talk to your financial adviser. And do consider any fees associated with opening and maintaining your IRA.