What Is an IRA?
Depending on the bang out of IRA you have, you will either have tax-free or tax-deferred growth.
But your contributions are pre-tax.
But that money will grow tax-free.
Investopedia outlines more differences; check outtheir post on this topic.
But in general: traditional IRA = pay taxes later; Roth IRA = pay taxes now.
So which one should you pick?
If you’re in a higher tax bracket now, you should go with traditional.
We’ll discuss this more in the 401(k) section.
In the meantime, consider the flexibility of the Roth, too.
you might withdraw your contributions without incurring a penalty, which gives you more access to your money.
If you want to take out your earnings, you’ll pay a 10% penalty.
Eligibility
Not everyone is eligible for a Roth IRA.
Check out their full post for more detail on eligibility.
Traditional IRAs have eligibility requirements, too.
you’re able to’t deduct your contributions from your income if you earn over a certain amount.
Check out the IRS page onIRA deduction limitsfor more info.
Rollover IRAs
There’s another “punch in” of IRA: rollovers.
These are other retirement plans (like a 401k) that are transitioned into a traditional IRA.
To avoid the 20% penalty, the rollover must take place directly from one custodian to another.
Many IRAs will only allow one rollover per year on an IRA to IRA transfer.
The one-year calendar runs from the time the distribution is made.
Why would you want to rollover your 401(k)?
Moving your money into an IRA gives you more control over ityou can pick your funds.
And 401(k) fees can be high.
In fact, they offersix reasons to not roll over your 401(k).
Should I Have an IRA?
Now you know the major differences between the basic types of IRAs.
But you might also consider a Solo 401(k) or a Keogh Plan.
We’ve written about other retirement plan options for the self-employed in ourpost on switching careers.
For the most part, though, an IRA is the simplest way to go.
But let’s say you’re not self-employed or freelance.
What if you have a full-time job that offers a 401(k)?
You might still consider opening an IRA.
Here’s how it would work.
If your employer offers a match, always contribute to that plan first.
And confirm you’re getting the total match.
If, after that, you still have money you’d like to save, consider a Roth IRA.
You’re basically doing both.
Some call this “tax diversifying.”
Large companies tend to have great 401(k)s. Small companies?
“Your plan is probably expensive as all get-out.
But after contributing up to that match, most experts agreeit’s better to save in an IRA.
How Much Can (and Should) I Invest?
ForSEP-IRAandSimple IRAcontributions, check out the linked info from the IRS.
It’s a little more complex.
But if that number seems high, don’t worryevery little bit helps.
You should definitelycheck out her full post, which includes lots of handy calculators.
The gist of it:
Determine when to retire.
Estimate what your expenses will be in retirement.
Make an inventory of your current assets and savings.
How Do I Pick Investments?
A 401(k) usually comes with a menu of options to choose from.
This makes it easy, but there’s not much flexibility.
With an IRA, you have to pick your own investments.
This is great for flexibility, but it also means you’ll have to do a little more research.
Bankrate offers ahelpful tool for figuring this out.
Mutual funds make things much easier.
These funds are made up of different individual investors.
There aredifferent types of mutual funds, but index funds are a really popular option.
They’re simple, and their return is designed to match the stock market’s return.
An investor in an index fund figures that most managers can’t beat the market.
An index fund merely replicates the market return and benefits investors in the form of low fees.
For bonds, Forbes offersa list of bond funds.
Although, some experts argue bonds should beactively managed(not purchased through funds).
How Do I Open One?
Once you decide how you’ll invest, you’ll have to choose a place to invest.
NerdWallet offersa list of recommendations.
For beginners, they recommend E-Trade.
For index funds, they recommend Vanguard.
Opening an IRA is similar to opening any kind of savings or checking account.
Head to the institution’s website (or give them a call), and fill out some info.
They’ll ask for some basic personal information.
If you’re rolling over, you’ll have to include info from your previous retirement account.
With many index funds, you’ll have to contribute at least $2,500 to start investing.
Don’t have that much?
Check out our post onhow to get started investing with very little money.
There are some funds with which you’re able to start investing for just $100.
Index funds make investing simple and accessible.
This, and some basic knowledge about IRAs, should help you get started.
And the sooner you get started saving for retirement, the better.
