An IRA (Individual Retirement Account) is an account that allows any individual to save for retirement with tax-free growth or on a tax-deferred basis. Many financial experts advise that you need to invest approximately 85% of your pre-retirement income into retirement. An employer-sponsored savings plan, such as a 401(k), might not be sufficient to accumulate these savings you might need.
You should aim to put the maximum amount in your IRA each year. Make sure to monitor your investments and make adjustments as needed, especially as retirement nears and your goals change.
There are 3 main types of IRAs each of them have different advantages, as follows
– This IRA allows you to make contributions with money you may be able to deduct upon your tax return, and any earnings can potentially grow tax-deferred until you withdraw them later on in retirement. Many retirees find themselves in a lower tax bracket than they were in pre-retirement. This tax-deferral means the money will be taxed at a lower rate.
– You make contributions with money you’ve already paid taxes on (after-tax), and given that certain conditions are met, your money grows tax-free, with tax-free withdrawals in retirement.
– You contribute money “rolled over” from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.
In order to start an IRA, there are four fundamental steps
Decide How Much Help You Want:
What kind of investor are you — hands-on or hands-off?
- If you want to choose and manage your own investments, you’ll need an online broker. Here you’ll open an account and buy and sell investments yourself over time.
- If you’d like an automated way to manage your investments, consider a robo-advisor. A robo-advisor will choose low-cost funds and rebalance your portfolio, keeping it in line with your investing preferences and timeline for a fraction of the cost of hiring a human financial advisor.
Choose Where You Should Open Your IRA:
Your choice should align with your investor type above.
Open an Account:
It takes just a few minutes. The actual steps will vary slightly by provider, but opening an IRA is not difficult. You will need to head to the provider’s website, choose the type of IRA you want to open (Roth or traditional) and fill in some personal details such as your Social Security number, date of birth, contact information and employment information.
Fund the Account and Get Started:
If you decide to go with a broker, look for low-cost mutual funds and ETFs. If you choose a robo-advisor, it’s a bit faster as they’ll pick investments for you. Banks also offer IRAs, but they are focused on saving money rather than growing your money. For a long-term goal like retirement, investing with a broker or robo-advisor makes the most sense.