An individual retirement account (IRA) is a great way to save for retirement and can be a supplement to your employer-sponsored 401(k) account. If your employer doesn’t offer a 401(k), you're self-employed or you're pursuing education full time, an IRA is a great way to build wealth.
If you’re looking to diversify your retirement savings and build towards a more comprehensive financial portfolio, opening an IRA may be right for you.
Step 1: Decide between a traditional or Roth IRA
First, you’ll need to decide whether a traditional IRA or a Roth IRA is right for you and your retirement goals. These two plans highlight the benefits of opening an IRA; you can watch your money grow either tax-free or on a deferred tax payment plan.
A traditional IRA is tax-deferred—you will not need to pay taxes on your annual contributions when you file your federal taxes. However, you will be required to pay taxes on that money when you withdraw your savings in retirement. As a general rule, traditional IRA accounts are typically better for men and women who are established in their careers and who anticipate being in the same or a lower tax bracket when they retire.
A Roth IRA is the opposite; you’ll have to claim your contributions on your annual federal taxes, but you won’t have to pay taxes when you withdraw your money in retirement. A Roth IRA is usually better for younger men and women or those who have recently switched careers, as they will typically be in a higher tax bracket when they decide to withdraw their money in retirement.
Neither a traditional IRA nor a Roth IRA is inherently “better” than the other—you’ll want to consider your specific circumstances to determine which type of account is more advantageous.
Step 2: Choose a provider
Nearly every type of financial institution has its own plan to allow customers to open a traditional or Roth IRA. From mutual fund powerhouse Vanguard to famously simple stock trading giant E-Trade, each provider has its own unique list of pros and cons when opening an IRA. Before choosing a provider, you’ll want to consider a number of factors: commissions, expense ratios, annual fees, account minimums, selection of equities and customer service options.
You can take a look at our comprehensive guide to the Best IRA Accounts, or you can compare a few of our favorites and decide which provider is best for you.
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Once you’ve made your selection, opening an account is simple and can typically be done online. All you’ll need is your personal information (social security number or taxpayer ID, your full name, your address, and a beneficiary). If you need assistance, contact your financial institution’s customer service team.
Step 3: Meet the minimum balance
Some IRA providers have minimum balances that must be met before you’re able to make your first buy, ranging from $0 to $3,000. Some IRA providers also have minimum balance requirements for different types of accounts; for example, you can open the Vanguard STAR Fund (VGSTX) for as little as $1,000, but you’ll need to make a $3,000 commitment to buy into most of Vanguard’s commission-free mutual funds and ETFs.
Be sure you know your minimum balances before opening an account, and remember that you’ll be penalized if you withdraw money from your IRA before you retire.
Step 4: Make the buy
Most IRAs are composed of two types of equities: stocks and bonds. You can purchase individual stocks or you can invest in a mutual fund that pools money with other investors to back a larger segment of the market. The percentage of stocks and bonds will depend largely upon your age and risk tolerance.
As a general rule, stocks may be better for younger investors who can ride out the curves of the market and bonds may be better for older consumers who are looking for the peace of mind that their retirement savings won’t be wiped out should the economy take a dive. Consult with your financial institution’s customer service specialists for recommendations on the best asset allocation for you.
Nearly anyone can benefit from opening an IRA—they allow consumers to watch their money grow without depending on an employer’s 401(k) account. It’s important to note that you can legally only contribute a certain amount to your IRA each year. You’re limited to $5,500 in contributions if you’re under the age of 50, and that number goes up to $6,500 if you’re 50 or older.
An IRA is a great account to consider opening if you are a younger investor, as the annual contribution limit will allow you to get the most out of your account before you reach retirement--and it’s never been easier to get started.
Looking for more help getting started? Check out Benzinga’s list of the top IRA providers to learn more about the best companies that offer IRA assistance.