Back when I was in my 20s, I opened up a retirement savings plan called an IRA. An IRA (short for Individual Retirement Account) is a personal retirement savings plan that lowers your tax bill while saving money for the future.
Anyone with a job can open an IRA, there’s no restriction except the amount of money that can go into an IRA. If you are under 50, the maximum yearly contribution is $5000. Once you hit 50, the feds let you make an additional “catch-up” contribution of an additional $1000 a year, for total amount of $6000.
Aside for saving for retirement, an IRA can also lower your tax liability. If you make $40,000 a year and put $5000 in an IRA, you are only taxed on what you bring home, which in this example is $35,000. Even better yet, as the IRA increases in value and pays out dividends, the taxes on the profits are deferred too as long as those funds are rolled back into the IRA. It isn’t until you start taking out those funds that they become taxable just like a regular weekly paycheck.
It’s important to remember that IRAs aren’t designed to be tapped into until the contributor reaches the age of 59 1/2. Pull out money early, and you’ll discover that there’s some hefty penalties and taxes involved.
So how do you go about opening an IRA in the first place?
When I opened up my IRA, I was a little surprised to discover that they are a lot more complicated than depositing money into savings. IRAs are made up a broad range of investments and for those who aren’t investment savvy at all, choosing what works will for retirement and what we are willing to gamble is not a decision to tackle by yourself. My IRA portfolio, to use as an example consists of a mix of specific stocks, bonds, and mutual funds. Certificates of Deposits (CD) and money market funds can also be part of an IRA portfolio.
There are basically three choices of where to go when it comes to opening an IRA: a bank, a brokerage firm, or a mutual fund company.
Banks are ideal for brand new investors who don’t have a lot of cash to start. My bank only requires a minimum of $100 to open a Bank IRA which can be invested in either CDs or a money market fund. Customers can even open an IRA on-line for total convenience.
A mutual fund company is the second alternative available for a newbie IRA investor. A company that covers a wide assortment of investments is your best bet here. These firms generally require a minimum of $1000 to open up an IRA. Do watch for the fee structure, there’s quite a range.
The brokerage firms are for those who know specifically what stocks to pick and how to play the market. Brokerage firms also have financial advisors who can make the picks for you. Of the three, the brokerages firms seem to charge the highest fees which can take a big chunk of your IRA if you are constantly shifting funds around.
For the average Joe (or Jane) who doesn’t know the first thing about opening an IRA or where to even start, help might be closer than you think. Your accountant, personal banker or even insurance agent should be able to steer you in the right direction and get you started on the path of retirement savings while lowering your taxes as well.
About.com “Opening an IRA.”
Foolcom ” What the Fool is an IRA.”