An IRA, an Individual Retirement Account, is used to help you save for retirement. There are tax advantages to investing in an IRA. Depending on the IRA vehicle that you choose, you can either invest pre-tax dollars and pay taxes when you withdraw, in a traditional IRA, or you can invest after-tax dollars and pay no taxes when you withdraw, through a Roth IRA. Either way, you can learn how to set up an IRA account here.
Decide whether you want a Roth IRA or a traditional IRA. A traditional IRA allows you to take a current-year tax deduction, while a Roth IRA accrues income tax free but does not allow for a current tax deduction. The question you need to ask yourself is whether you want to pay taxes now or pay taxes later. There are also a few other specialized IRAs such as the SEP IRA (self-employed or small business), a SIMPLE IRA (employee pension plan) and a Self-Directed IRA (allows the holder to make their own investments into the plan).
Choose a place to invest your money. There are many IRA brokers with varying fees and trading commissions. You can also set up an IRA by using a bank, mutual fund company, employer, stockbroker or other financial institution who will act as a custodian or a trustee. Examples are Vanguard, Fidelity Investments, T. Rowe Price and Schwab.
Download or request the applicable forms to open up the account. Complete the forms and attach a check for the amount to be funded.
Choose the types of investments that you want your IRA invested in. Examples are stocks, mutual funds and index funds.
Watch your investments grow until retirement.
Set up an automatic transfer every month or twice a month to fund the IRA account. Seek a financial adviser to obtain advice on the type of IRA (traditional or Roth) and types of investments the IRA should be invested in.
In some cases, penalties are incurred for early withdrawal. Under certain circumstances, money can be withdrawn from the IRA account for certain expenses such as first-time home purchase, college tuition or medical expenses. Be careful with this option because you lose the tax benefits.