Category: Opening an IRA

Estimated reading time: 3 minutesMost people know they should be saving for retirement, but either feel they don’t have enough in their budget right now to contribute or don’t know where to start. Some companies offer employees a retirement option called a 401k, where the company will typically match the contribution of the employee up to a certain percentage of their paycheck. Another retirement option you can take advantage of with or without a 401k is called an Individual Retirement Account (IRA). You won’t be able to contribute as much to an IRA as you would to a 401k, but IRAs aren’t tied to certain companies. Anyone with an income can open an IRA, but there are still contribution limits, tax credits, and withdrawal rules associated with these types of accounts, just as with 401k accounts.

IRA or 401k?

            If your company offers 401k plans, most financial advisors would recommend contributing to those types of accounts first because of the company match option. You will want to contribute up to at least that match offer because it’s basically free money you get for retirement. Why not take advantage of free money? IRAs, however, have a much lower contribution limit at $6,000 (or $7,000 if you’re older than 50). If you can contribute to both types of accounts, ask your financial advisor what would be more advantageous for you based on your age, your retirement goals, and the benefits and fees of each type of account.

Traditional or Roth?

There are two basic types of IRAs—Traditional IRAs and Roth IRAs. Both have the same annual contribution limit, but differ in qualification factors, tax benefits, and withdrawal rules. With a traditional IRA, anybody can contribute as long as you have an income to be able to. You may also have the ability to write off all or part of your contribution on your taxes depending on your income level. However, you will have to pay income tax on your distributions once you start using the money for retirement. With a traditional IRA, you must take your first distribution by 72, but you can begin to take distributions at age 59 ½ without penalty. For Roth IRAs, you may be able to contribute the full limit or part of the limit depending on your income. Typically those with low income now will contribute to a Roth IRA instead of traditional. While you won’t receive a tax benefit up front contributing to a Roth, your distributions will also be tax free when you’re ready to withdraw. As long as your account has been actively open for five years or you’ve reached age 59 ½, you may withdraw funds from your Roth IRA with no penalty.

Opening an account

When you are ready to open your own retirement account, take into consideration cost of fees, minimum investment amounts, how the account is managed, and what types of investments you want to contribute to. Some options will charge a set-up fee up front, while others may only charge commission on profits. If you prefer person-to-person contact with your account manager, you may want to sign up with the account that offers in-person advice. If you trust computer algorithms to handle your financial decisions, you can choose a robo-advised account and typically pay a much smaller management fee. Lastly, some investment options are inherently more risky, such as individual stock options, while others tend to be on the safer side, such as bonds and mutual funds. A diversified account is always smart, but the ratio of risky to safe investments will depend on your age, your retirement goals, and how well you can handle market turbulence. Usually younger investors will include more risky options, while those closer to retirement will want to stick to the safer side of things.

There’s a lot of information out there regarding retirement accounts and how to best save using them—it can feel overwhelming! The worst choice you can make is avoid deciding on a retirement account and end up not saving at all. Talk to your financial advisor today to get started investing into your future.