Opening an Individual Retirement Account (IRA)
IRAs are savings accounts that allow for tax-deferred (or, in some situations, tax-exempt) growth. The acronym IRA stands for “Individual Retirement Account”. These accounts are set up to encourage retirement savings.
Contributions are tax-deductible, and depending on your income bracket, your earnings may also be tax-deductible.
Depending on the type of IRA you use, you can contribute a certain amount every year until you reach the age of 70 1/2 (known as “the age requirement”). Once you reach the age of 70 1/2, you must begin taking required minimum distributions (RMD) from your account(s).
One important note is that if you try to take money out before the age requirement, you will be subject to surrender charges.
Types of IRAs
There are several different types of IRAs. The most common ones are Traditional, Roth, Simple, and SEP IRAs. They differ in terms of the tax treatment they receive.
Traditional IRA are taxed at withdrawal (so you end up paying taxes on your investment, as well as any gains). This account type is good for people who expect to be in a lower tax bracket in the future than they are currently.
Roth IRAs are taxed at investment (they do not receive any tax exemptions when you put money into the account, but your gains and withdrawals are completely free of taxes). This account type is good for people who expect to be in a higher tax bracket in the future than they are currently.
SIMPLE IRAs are like traditional IRAs, except that they require that employers allow for certain types of contributions. The contribution limits are also lower than standard Traditional and Roth IRAs.
Simplified Employee Pension IRA (SEP-IRA)
This account is very similar to a Traditional IRA, except it can also be used by small businesses. Individuals cannot contribute more than 25% of their income or $56,000 – whichever is less.
For people who want to open a retirement account, but do not have their own business or income from which they can contribute up to 25% of their income).
Individuals cannot contribute more than 20% of their self-employment income plus $56,000 – whichever is less. There are other rules you must follow to be eligible.
Steps to Open an IRA
Opening an IRA is simple; all it takes is opening an account at a brokerage firm and/or opening an account with your bank.
You should speak with either your financial planner or your accountant about which types of accounts you should open; this way, you can make sure you use a type of IRA that best suits your needs.
Step One: Opening an Account
If you’re interested in opening an IRA with your bank, there is generally no set fee for this type of account. Opening an account with a brokerage firm will cost you $25 to $500 per year (depending on which brokerage firm you use).
There is no limit on the number of IRAs that you can open. Opening multiple accounts allow you to diversify your portfolio.
Step Two: Choose an Investment
Choosing which investments to place in your IRA is important since all of the gains you make will be tax-free (as long as it’s an approved investment for your IRA).
Step Three: Fill out Forms
You will need to fill out a few forms before a broker or financial planner can open an account for you. Forms you may need to fill out include the W-9 form (if they are an outside broker), a deposit slip, and an IRA application.
Once your forms are received by your brokerage firm or bank, you will be able to open your account. Opening an IRA can get you ready for retirement!
Step Four: Fund Your Account
Once your account has been opened, you can fund it with money. If you open an account with a broker, it will be much easier to transfer money from another bank or brokerage firm than if you open an account with a bank.
If you decide to go through a broker for your IRA, one thing to remember is that the fee structure can be based on a percentage or a flat fee.
Where to Open an IRA
Now that you know what an IRA is and have decided to open one, you need to decide where to actually open your account. Opening an IRA at the wrong place could cost you, so it’s important to do your research before choosing a brokerage firm or bank.
Here are some of the best places to open an IRA:
TD Ameritrade and Scottrade are the best places to open an IRA because you have access to all of their investment products without paying commission fees. Opening an IRA at TD Ameritrade or Scottrade will cost you $9.99 per trade.
You can open a Roth IRA with no minimum deposit and start investing for retirement with only $100 (plus the annual fee of 0.25% of your account balance).
Betterment offers different options for investments and will give you a quote based on how much risk you’re willing to take.
Wealth front has the lowest minimum investment of any IRA at $500 (with no annual fees). Opening an IRA at Wealth front is similar to opening a Roth IRA, but you receive access to your investments for one year.
Opening an IRA at Wealth front will also only cost you 0.25% annually of your account balance, but opening one may not be as simple as it is with other brokerages.
If you have a few extra dollars to invest, Fidelity Investments is a great option for your IRA. Opening an IRA here will not cost you any fees.
American Funds are an investment management company that offers different types of accounts depending on what kind of investing you’re looking for (growth or income).
Opening up an account with American Funds will require a $1,000 minimum investment. Opening an IRA with American Funds will cost you $20 + .85% annually of your assets in the account.
Stack up Investments
Stack Up Investments is a good option if you want to invest in stocks or ETFs and pay one inexpensive commission fee (the fee structure varies based on your account).
Opening an IRA with Stack Up will cost you $19.99 if you want to invest in stocks (or ETFs) and $24.99 if you want to invest in mutual funds or bank instruments.
Loyal3 and Motif Investing are both good options if you want to open an IRA quickly and without too much paperwork. Opening an IRA with Loyal3/Motif will cost you $9.95 per trade.
Opening one with these two companies is fast and easy, but opening up an account may take longer than at other places (usually in-person or on the phone).
These are the best places to open an IRA because they offer the lowest fees, as well as easy-to-use and feature-packed websites.
Opening an IRA at either place will allow you to diversify your investments with ease. Opening an account at any one of these institutions is a great choice; opening an account at both would be even better!
Benefits of Opening an IRA
There are several benefits of opening your own IRA(s). These include:
- Tax breaks on contributions
- Tax breaks on earnings (believe it or not!)
- You can contribute to multiple accounts
Drawbacks of Opening an IRA
There are drawbacks to opening an IRA, including:
- Opening and maintaining an IRA limit your investment options.
- If you withdraw money from your IRA before retirement age (59 ½), you may be taxed on the total amount.
- You can’t always access your money before that time without getting hit with surrender charges.
Why You Should Open an IRA Now
The best time to open your own IRA depends on how old you are; the younger you start, the more time your money has to mature and grow.
Opening an IRA now will allow for a longer period in which to take advantage of compound interest (and other advantages). There’s no better time than right now.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.