How to Save and Invest in an Individual Retirement Account

New tax laws have enhanced your ability to create a financially comfortable retirement through tax-deferred saving and investing. Make your IRA part of a comprehensive financial plan.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Financial Calculator
• Internet Access
• Brokerage Accounts
• Computers

1. Check IRS rules to make sure your salary qualifies you to open an Individual Retirement Account (IRA).

2. Research the different IRA types (such as traditional and Roth) thoroughly, making sure you understand their unique tax-favored features and how many of them apply to you.

3. Review your W-4 or other appropriate Internal Revenue Service tax-payment schedules and make adjustments if not current.

4. Calculate the maximum contribution you can make to an IRA.

5. Determine how much money you can afford to deposit annually in the IRA up to your limit.

6. Choose a reputable financial institution that provides the services and options you need at reasonable cost. You can hold stocks, bonds and mutual funds in your IRA, and it can be administered by a bank, mutual fund or brokerage firm.

7. Fund the IRA. You have until April 15, unless you file a tax return extension, to make IRA contributions for the previous tax year.

8. Allocate the money in your IRA into investment choices that accommodate your retirement goals and risk tolerance.

9. Consider purchasing a variable annuity within your IRA from a highly rated insurance company to protect the value of your account. Your investments may have a lower market value at the time of your death.

10. Consider having your employer make automatic electronic transfers to your IRA to keep you on target.

11. Review your financial situation at least annually to determine if you can contribute more or if your qualifications for contributing have changed.

12. Consider reallocating your IRA money to lower-risk investments as you get closer to retirement.

Tips & Warnings

• Consult a qualified tax accountant or financial planner prior to opening your IRA if you don't have a financial plan or if you are not well informed of newer tax laws for IRAs.
• Only deposit money that you know you won't need soon, because penalties may apply to withdrawal prior to age 59 1/2. If certain types of emergencies arise, the IRS does permit access to IRA monies without penalty.
• If you're currently enrolled in an employer-sponsored retirement, pension or deferred-compensation plan, you may not be able to deduct your IRA contributions on your income tax return.
• Avoid accounts with high account-transfer or closing fees, as you may want to move your IRA later.
• Leaving all of your IRA in low-interest savings accounts, while safe, may cause you to miss out on significant market growth, which can exceed 10 percent.
• Large allocations in high-risk investments could result in your retirement account's being greatly diminished or wiped out.

[Bulldog6]

on 10/26/2008 Good tips. I would add, go to your local library and just start browsing the Weisenberger's annual. It's in most libraries. It is a very expensive book, hundreds of dollars, but it lists every mutual fund that is available as an IRA and is a tremendous reference. I started my investments with it. Also, even if you can't deduct your IRA contributions, invest it anyway. You still beat the taxes by deferring it on the interest which helps to compound faster.

[RonChapmanJr]

on 7/14/2008 Also make sure your allocation is correct. We recommend that at www.positivereturns.net A rule of thumb to figure out what percentage of your money you should have in stocks is 120-your current age. If you are 50, then you should have 70% of your money invested in stocks. Some consider that too high, but nevertheless it is a good starting point.

[psaysofavril]

on 3/28/2008 Reviewing your ability to invest annually is a great tip. Whenever you unexpected income, you should look at increasing your investing.

http://www.ehow.com/how_2184568_money-during-recession.html

on 11/22/2005 Term life insurance fills a need different from an investment for your retirement. Research the Roth IRA - take advantage of it now.

on 11/22/2005 Term Life Insurance is also an investment option to consider.