So maybe you’re starting to get just a little bit older, maybe you’re making a little bit more money now, enough to start setting some savings aside, and maybe you’re wondering, what am I going to do for money when I retire? Social Security isn’t going to pay your bills, if it’s even there at all by the time you reach the age of retirement. So you’re looking for different ways to start saving for your retirement. An IRA, Individual Retirement Account, is the most popular and really the best way to go.
But what exactly is an IRA? First off, an IRA is not the same thing as a 401K. With an IRA, anyone who is less than 70 and ½ years old qualifies and can open his or her own individual retirement account, or IRA. Shoot, even children can open their own IRA accounts, just as long as they’re the ones earning the money. There are of course fees, expenses, and investment performance considerations, but the decision-making process is simple.
There are basically two types of IRAs to choose from: the traditional IRA, and the Roth IRA. Your decision which one to choose, which one best suits your needs, will depend primarily upon what your income level is now, as well as your expected tax bracket by the time of your retirement. Let’s say your AGI, Adjusted Gross Income, is no more than $116,000 per year. This puts you into the higher tax bracket upon your retirement. In this case, you should consider the Roth IRA. Your contributions, while not tax deductible at the time your contribute them, will be tax fee at the time when you decide to draw them out.
If however you anticipate your tax rate will indeed be going down, as many do, then the traditional IRA is the way to go. With the traditional IRA you get to deduct your IRA contributions now, but of course you will pay money when you eventually withdraw them from your account. Contributions for both tradition and Roth IRAs are limited to $5000 per year, $6000 if you are fifty years or older.
So how do you get started? How do you go about setting up your IRA? Where do you set up your IRA? You can of course invest in a high-yield investment fund, but with big returns come even bigger risks. If you’re more the conservative type, if you really just want to know that the money you put aside for your retirement is going to be there when you need it, then a low-interest bearing money-market fund is probably the better route for you. Either way, every day that you delay is another day you’re not earning interest, so the most important thing is to just get started.
Where to Open an IRA
There are three places where you can put your money when setting up your IRA: a mutual fund, a brokerage account, or even your local neighborhood bank. You can also choose to invest your money in any type of security, really. You can invest your IRA in mutual funds or stocks if its greater return you’re after, or even bonds if it’s security you’re looking for. If you’re really just not sure, the best first move is always the safest move, which is also the lowest yielding investment. Start right there at your local bank. Especially when just starting out, when the amounts your contributing are still relatively small, a bank may be just the right place for you. As stated earlier, there are limits to how much you can contribute every year, but the amount you need to get started can be as little as just $100. Most any bank can help get your IRA started with investments in a highly secure portfolio like a certificate of deposit (CD), or even a money-market account. Many will not even charge you their standard annual fee. For average rates, you can check the pages of Bankrate.com.
If this is your first time though, we suggest to all newbies a mutual fund. These are the easiest and quickest way to get you started. This type of investment means that your IRA account will be handled by the professionals. Let the guys who know the market decide the safest places for your money. Funds like this typically spread your investments around to lower risk. Again, since you are just starting out, take it slow at first until you get a good feel for it.
More advanced funds may require a more substantial initial investment, some as high as $1000. Be sure and go over the terms of the agreement very carefully. You’ll want to know exactly what sort of commissions and fees your broker is charging you so there will be no surprises. Management fees for stock funds averages around 1.4%, but don’t be afraid to shop around. You can always find lower rates if you put the time and effort into it. Many brokerages will even let you open your first IRA online, even allow contributions from an automated system like your checking account. Remember though, while this makes it much easier, always keep a close eye on your accounts. It is after all, your money.
If you feel comfortable with investing however, you may choose to purchase individual securities in your IRA. By doing it this way, of course you will have to pay the commissions on your trades, but you may avoid costly management fees. If you’re interested in mutual funds, seek out no transaction fee, no-load funds. Many online brokerages like Scottrade and TDAmeritrade offer thousands of no-load funds.
If you want to play with the big boys though, go with the seasoned pros, there are what are known as The Big Three: Fidelity, Vanguard, and T. Rowe Price.
- Fidelity offers the very popular no-fee IRA. There is of course a minimum investment of $2500, but they will actually wave this if you do make a commitment to $200/month automatic contributions. Fidelity offers nearly 5000 different mutual funds, many with no transaction fees at all. So in realty, you can open a Fidelity IRA today with as little as $200.
- Vanguard also offers the no-fee Roth IRA. To start at account at Vanguard, you must commit to at least $1000 and join their STAR fund. The STAR fund is considered the best choice for beginners, and the safest as well. To get a STAR fund started today, there is no fee.
- Last but not least is T. Rowe Price. While Price does charge a modest $10 a year fee for a Roth IRA account, they do wave this fee once your account reaches the $5000 level. The minimum investment is $1000, but like with Fidelity this is waved if you commit to a minimum $50/month contribution. The best part about T. Rowe Price though, there are no sales fees or commissions.
The minimums may be a bit higher for one of the heavy hitters, but they have all been around a long time and all weather many bad economic storms. The nominal fees and minimum investments will bring returns to you many fold.
One other important note about a Roth IRA: all funds must come from income, meaning a job. To open a Roth IRA, it’s really as simple as filling out a job application. That’s all there is to it.
When to Open an IRA
So when should you get started? How long should you wait to set up your first IRA? There’s no time like the present. If you’re not getting traction, then you’re treading water. But enough of the clichés. Seriously, the sooner you get started on your IRA, the sooner you get serious about thinking what you’re going to do for money in your retirement, the better. We’ve all seen how volatile the market and the economy in general can be. Can you imagine yourself at age seventy out looking for a part-time job because you didn’t start thinking about your retirement early enough? How about having to leave your home of thirty years because you just didn’t get started soon enough thinking about what you will do when you stop earning income. Get your retirement fund, your IRA, started today. With as little as just $100 you can set up your first account and get the ball rolling. It may not seem like much, but it’s that first step that’s oh so important. If you don’t take care of yourself in your retirement, who will?
And think about this. Even though we’ve seen the stock market on the downside in the past couple years, stocks have returned on average just over 10% all the way back to 1926. Investing in the market and investing in your retirement are both long-term propositions. And if you do the math, with all that wonderful compounding interest over the years, that 10% average is going to turn into a lot of money for you. Ask any banker, or mathematician for that matter.