Starting an Investment Retirement Account
Individual Retirement Accounts (IRAs) are special investment accounts that provide tax benefits for people saving for retirement or major expenditures. If someone does not have a 401(k) plan, starting an investment retirement account is a good alternative. An IRA can also be used to invest more money when the limits of a 401(k) plan have been reached. Anyone who has earned income can open an IRA, although you must be less than 70 and one half years of age to start a traditional IRA.
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Instructions
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Learn the differences between the two common kinds of IRAs, traditional and Roth. Contributions to a traditional IRA are tax deductible, but you will have to pay taxes on funds you withdraw when you retire. This a good option if you expect to be in a lower tax bracket when you retire. A Roth IRA works in reverse: contributions are not tax deductible, but you don’t pay taxes on the money you take out later. Roth IRAs have another advantage: you can use them for shorter-term purposes. For example, many people use a Roth IRA to save for a child’s college education. To learn more, go to the Kiplinger’s website (see Resources).
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Decide on an investment approach. Most people choose to start an IRA through their bank, a mutual fund or by opening an account with a brokerage house. Starting an investment retirement account by setting up an IRA with your bank is easy and doesn’t require you to have experience with investing. An IRA account with a brokerage house is the most challenging, but offers the best potential returns as you will be choosing stocks and managing your investments yourself. Mutual fund IRAs fall in between, offering good returns but requiring more knowledge and attention than an IRA with a bank.
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Talk to your bank manager about starting an investment retirement account. Banks are safe and generally charge low fees. If you choose to buy certificates of deposit, there may be no fees at all. CDs are also insured up to $100,000 by the FDIC. For the young person who may not have a lot of knowledge about investing, this can be an ideal starting point, especially since banks often have minimum investments of as little as $100.
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Consider opening an IRA with a mutual fund. Mutual funds are portfolios of stocks chosen by a professional fund manager. Fees are generally modest (averaging 1.4 percent) and a good mutual fund offers excellent returns. Although this approach eliminates the need for you to research individual stocks, you should check out mutual funds carefully before investing. Get a copy of the fund’s prospectus and read the terms. Check out the fund’s performance over the past five years and pick one that consistently outperforms market averages. Its best to pick a no-load fund. This is a fund that does not charge you a part of the money you invest up front (as much as eight percent).
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Open a brokerage account with a discount broker if you have some experience and knowledge of investing. Discount brokerage houses charge low fees will set up an IRA account for you online. Brokerage accounts usually require a minimum investment of $1000. For the experienced investor this is usually the best option. However, keep in mind that if you take responsibility for choosing your own stock investments, it’s up to you to do the research required to make sound investment decisions.
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Tips & Warnings
See Resources to download IRS publication 590 that lists complete rules governing IRAs.
