If one of your New Year’s resolutions is to finally start saving for retirement, an individual retirement account may be just what you need. IRAs offer a tax-advantaged way to save for the future but they’re not all created equal. If you’re planning to open your first IRA in 2018, we’ll help you get started. Here are three tips you’ll need to consider.
1. Decide What Type of IRA You Need
What kind of IRA will work best for you? Generally you have two options: You can open a traditional IRA or a Roth IRA. The annual contribution limit is the same for each type of account ($6,000 for tax year 2019 and 2020 or $7,000 if you’re at least 50) but their contributions are treated differently for tax purposes.
With a traditional IRA, your contributions may be partially or fully deductible, depending on your income, filing status and whether you’re covered by an employer’s retirement plan. When you withdraw funds from a traditional IRA in retirement, you’re required to pay income taxes.
A Roth IRA, on the other hand, grows tax-free. But you won’t get to deduct your contributions.
If you’re young and you expect to be in a higher tax bracket in retirement, opening a Roth IRA may be a good idea. But if you’ve landed a high-paying job and you think your income will decrease in retirement, getting a tax break up front might make more sense.
2. Decide Where to Open Your IRA
Generally, you can open an IRA at a bank, set one up through an online broker or open an account with a mutual fund provider. Each of these options has its pros and cons.
If you set up an account at a bank, your investment will probably take the form of an IRA CD. A CD (or certificate of deposit) won’t yield a high rate of return. But on the bright side, you can minimize your investment risk by opening an IRA CD.
If you decide to open an IRA through an online brokerage firm, you may end up with a better return rate. But you may have to deposit a minimum amount of $500 or $1,000. That’s still a better deal than a mutual fund provider, which may require you to pony up $2,000 (or more) before you can set up a new IRA.
Fees are another factor to take into account before contacting an online broker or mutual fund company. After all, you wouldn’t want fees to take a big bite out of your investment returns.
3. Choose Your Investments Carefully
After you’ve opened your IRA, the final piece of the puzzle is choosing your investments. You’ll need to select mutual funds, bonds or stocks that you want to add to your portfolio. If you’ve never invested before, mutual funds tend to be the easiest way to go.
A mutual fund typically holds a pool of assets, including stocks, bonds and money market funds. By having different investments grouped together, you can diversify your portfolio and reduce your investment risk. Just don’t forget to find out what fees you’ll be charged.
You don’t need to be an investment genius to open and fund an IRA. Taking the time to compare different accounts and their features can help you choose the account that’ll help you meet your savings goals.
And if you don’t have the time or the process sounds daunting, you can always turn to a financial advisor. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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