There are two types of IRAs: Roth and traditional. Roth IRA contributions are not tax deductible, but are tax-free when you withdraw them. If you will have a high income when the time comes to withdraw the funds, a Roth is a good choice. The traditional IRA is good for people who need to deduct the contributions they make now, but are not concerned about paying the taxes later because their income will be less.
The contribution limit is $5,000 a year for both IRAs unless you are 50 or older. People 50 and older can contribute $6,000 a year.
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Types of IRAs
Where to Put the Money
There are three options when considering an IRA. You can open an account with a bank, a mutual fund company or brokerage firm. It's fairly easy to open an IRA at any bank. Some will open the account for as little as $25 while others may want $100, but you certainly do not need a lot of money to open a bank IRA account. Most banks will let you invest in CDs or money market accounts. Some will also let you invest in stocks. Mutual funds usually require an investment of $1,000 or more. Some companies will let you open an account online and you can have automatic deductions from your paycheck. The brokerage firm is for more experienced investors who want to invest in stocks, bonds, or mutual funds.
When you open your IRA, there are two decisions you must make. You must decide between a Roth and a traditional IRA. You also must decide whether to invest in CDs and money market savings, or invest in mutual funds, stocks, and bonds. CDs and money markets are bank products, a choice you can make if you decide to open an account with a bank.
CDs are guaranteed fixed rates for a specific amount of time, usually a minimum of six months. A money market account is a savings account with variable rates. Investing in funds, stocks, and bonds allows you to spread your money out into different investment avenues. This can be risky if you are not familiar with investment choices.
Many people stay away from the stock market because it seems erratic, but according to kiplinger.com, the return is about 10 percent. With any type of investment, the further away from retirement, the more diversified you can be because you are looking at the long term. As you near retirement, it is wise to consider more stable investments.