Opening an IRA account is a snap in the digital age, with the ability to start an account online in just a few minutes. Before you click through to that new account, saving for your retirement demands a bit of diligent research. Take the time to learn the basics of IRA accounts, costs, and investment options. You'll save money in fees and commissions, and be able to map out a strategy for optimum results.
Traditional IRA or Roth IRA
There are two types of IRA to consider as you begin your search. With a traditional IRA, you save on taxes now, deducting yearly contributions from your taxable income. You pay tax later when you access the funds in retirement. Roth IRA yearly contributions are made with after tax dollars, making withdrawals tax-free in retirement. A peek at the Internal Revenue Service information on IRA Contribution Limits can help you decide which type of IRA best suits you.
Look at Fees and Trading Commissions
IRA accounts are offered by financial institutions such as banks, credit unions, brokerage firms, and insurance companies. Pay close attention to fees and trading commissions as you shop for an account. Scottrade is worth your consideration, with no fees for account maintenance, although there are commissions on stocks under $1. Highly regarded Vanguard IRAs have minimal account fees, but there is a $20 commission on some stock trades.
Choose a Financial Product for Your IRA
Once you decide on a financial institution for your IRA, you must pick what type of investment to fund the IRA with. There is a dizzying array of mutual funds, stocks, bonds, CDs, ETF funds, and high-yield savings accounts to choose from. A key consideration is how much risk are you willing to take in exchange for potential greater returns? Younger investors are able to withstand risk better with their longer window for retirement savings, while middle-aged and older investors tend to choose more secure investments. Many financial institutions have online tools to help you shop IRA investment options and compare risk. Etrade has a 4-step tool to customize your IRA, while Vanguard provides advice on choosing a fund for your IRA, pointing out the potential for growth vs. risk.
A Comfortable Fit, or Roll the Dice?
In choosing an IRA, starting with a view to low fees and commissions makes sense. From there, ask yourself what is your goal for your IRA account? How much do you plan to save, over how many years? How does your IRA fit into your overall financial picture? Look at the security of all your investments as you consider the level of risk for your IRA. Are you comfortable with risk in return for potential high growth? An aggressive mutual fund invested in stocks could be the answer for you. Risk adverse investors may prefer a fund invested in more secure instruments like bonds or CDs. Some investors have a bit of fun by opening more than one IRA with different levels of risk. This is allowed as long as you don't exceed overall yearly limits.