How to Select an IRA

IRAs, or Individual Retirement Accounts, can be a great way to save or invest for retirement. You may want to invest in an IRA in addition to any retirement plans you have at work, or if you don’t have a work retirement plan available. There are several types of IRAs, including the two most common, traditional IRAs and Roth IRAs. Both traditional and Roth IRAs have advantages and disadvantages, so you’ll need to do your research carefully to decide which is right for you. In addition, there are a wide variety of investment choices available for either type of IRA account.

Difficulty: Moderate

Instructions

Things You'll Need:

• Internet access
• last year’s tax return

Select an IRA

1. Find out if a traditional IRA is best for you. A traditional IRA allows you to take a tax deduction on the money you contribute, and the money grows tax-deferred until you qualify to withdraw it during retirement. In general, a traditional IRA may be best if you qualify for a tax deduction now and expect to be in a lower tax bracket when you retire.

2. Find out if a Roth IRA is best for you. The money you contribute to a Roth IRA is not tax deductible, but the money grows tax-free, with no tax due when you qualify to withdraw it during retirement. (This also means you don’t pay taxes on the earnings on your contributions.)

3. Decide between a traditional IRA and a Roth IRA. First, see if you qualify to contribute to an IRA (using the calculator in the resource links below) and, if so, how much. Consult your tax advisor if you have one. Note the rules for early withdrawal penalties and, for a traditional IRA, mandatory withdrawals when you reach a certain age.

4. Choose a type of investment for your IRA. IRA accounts are available through many banks, mutual fund companies and discount or traditional stock brokers. You can invest your IRA money in certificates of deposit (CDs), bonds, stocks or mutual funds that may invest in stocks, bonds or both. The type of investment you choose depends on how many years you have until retirement, the rate of return you want and your risk tolerance.

5. Research several companies that offer the type of investment you want. Check to see if they charge an annual fee for IRA accounts, and compare any other fees, commissions, or trading costs. Find out what the minimum amount is to open an IRA account.

6. Research the companies’ mutual funds, stocks or other investments. Some companies offer funds specifically designed for retirement based on a certain year that will automatically switch to more conservation investments as retirement approaches.

7. Select a company that meets your need, and open the type of IRA account you have selected.

Tips & Warnings

• The rules for IRAs are complex, and may change along with the tax laws. Do your research carefully before opening an IRA account or investing.

Resources

• Compare traditional and Roth IRAs with this article and calculator.
• Here is a quick guide to opening an IRA.