How to Choose an IRA

IRAs are a way to save money for your future without even realizing it. They are tax-advantaged and you can borrow against them in time of need.

Difficulty: Moderate

Instructions

1. See if your company has a 401K first. If you work for a large company and plan to remain there for a significant number of years, you may want to contribute there first as many companies will match part of your funds.

2. Decide how much money you will be able to contribute per month or quarter. If you are looking for a tax deduction, a traditional IRA may be the best choice. The money you put in is not taxed at the time, and will only be taxed at your regular rate when withdrawn after age 59 1/2.

3. Consider other options than a traditional IRA if you think you will want to take out money early. The penalties for withdrawing funds before the age of 591 /2 can be 10 percent or more.

4. Invest in a Roth IRA if you want to simply pay your taxes up front and avoid early withdrawal penalties or taxes being due when you start to access your funds. This is usually preferable, as you won’t have to pay taxes interest earnings.

5. Plan on using both types of IRAs if your income is too high to allow you to contribute the maximum to a Roth IRA. For example, if the yearly maximum contribution is $2,000, and you are only allowed to put $500 into a Roth due to income guidelines, put $1500 into a traditional IRA.

Tips & Warnings

• Sign up for automatic drafts from your paycheck or bank account to save all year. Take the amount you are going to save and divide it by 12 or 52 to see what your monthly or weekly contribution should be.
• Plan ahead when you leave a job, and try to roll over your 401K into an IRA or you could lose your matching funds. Convert traditional IRAs into Roth IRAs to save even more.