An Individual Retirement Account (IRA) is designed to allow individuals to save for retirement even if they do not have a 401(k) plan or if they have passed the limit for contributing to a 401(k) but still want to add to their retirement investments. As long as you have earned income, you can open an IRA account. The only limitation is that traditional IRAs have an age limit of 70-1/2 (this does not apply to Roth IRAs). Even minors can open an IRA account if they have earned income. The important thing to remember is that the longer you wait to open an IRA the less time there will be for earnings to accumulate, so delays will cost you money in the long run.
Do your homework. There are a lot of possible approaches to investing using IRA accounts and some are better than others each person. The links below will take you to the Kiplinger website which has detailed information on IRAs and to the IRS Publication 590 that explains the rules and regulations governing IRAs.
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Decide which type of IRA (traditional or Roth) is best for you. A Roth IRA does not give you a tax deduction but you will not pay taxes after you retire on money you withdraw. This is a good option for people who expect to be in a higher tax bracket after they retire than they are now. A traditional IRA gives you a tax deduction now, but you will have to pay taxes on the money you withdraw when you reach retirement.
Select the type of investment approach you need. Generally the three used are banks, mutual funds, and brokerage accounts. Banks are safe investments and usually charge low rates—or even none if you buy CDs. You can get information on the charges banks do make using the link at the end of this article. Mutual funds are also a simple means for inexperienced investors to open an IRA account. The funds do the research and choose the stocks for you. To evaluate a mutual fund, look at the performance and fees of the mutual fund (over at least a 5 year period). On average, mutual funds charge about 1.4%, but cheaper is not always better. You may be better off paying more if you get a mutual fund that provides well above average returns!
Open an IRA account with a brokerage firm if you are knowledgeable about investing. If you do this you are responsible for choosing the stocks, funds, or other financial investments. This s is potentially the most profitable strategy but it is generally not the best one until you have some experience with investing.
Open an IRA account online or by downloading an application and filling it out and mailing it (along with a check for your initial investment) to your chosen investment firm. There is usually a minimum investment ($1000 for most mutual funds, but as little as $100 for banks). The maximum contribution you can make is $5000 per year ($6000 if you are over 50).
Remember to keep all receipts and other documents as you will need them when it comes time to file your taxes each year.