Did you know that there’s no required minimum opening amount for an IRA? That means that even if you’ve just got a buck, you can go ahead and start one right now. (Assuming you meet the other requirements, which are spelled out in Publication 590.)
What kind of IRA should you start?
It’s going to depend. First let’s talk about what an IRA even is. It’s short for “Individual Retirement Arrangement”, and like the name suggests, it’s a way you can arrange to set aside money for your retirement, which you absolutely want to do even if you don’t know it yet ;)
Think of an IRA as a box with a label slapped on it. If your box has a Roth label on it, the money inside will be treated one way. If it has a Traditional label on it, it’ll be treated another way. You can have more than one box too, if you like. And in either case, the way you invest the money in your box is up to you. (Within the limits of the IRS rules.)
How do you decide?
So how do you decide what kind of IRA to open? In short, you weigh some pros and cons and then make your best guess, adjusting for changing circumstances as time goes on.
The main advantage to a Roth IRA is that qualified distributions are not taxable. That basically means this: You pay taxes now on the money you put in, but you don’t pay taxes when you take the money out so long as you follow the rules. Also, Roth contributions (but not anything you’ve earned on what you put in) can be withdrawn penalty- and tax-free any time, even before age 59 ½. (But avoid doing that if there’s any way you possibly can.)
And near as I can tell, the main advantage to a Traditional IRA is that it may reduce your taxable income now, depending on various rules. So you could pay fewer taxes now, but then you’ll pay taxes on the money (and the earnings) later when you take it out in retirement. If you’ll be in a lower tax bracket in retirement than you are now, that’d be a good thing.
No matter what you choose, remember that any IRA is better than no retirement savings. Me? I have most of my non-401k money in a Roth.
Where can you open an IRA?
There are tons of places you can open an IRA. Any number of banks, brick & mortar brokerage firms, and online trading sites will allow you to do so. I have my main account at TradeKing, because they merged with Zecco. Many people will recommend Vanguard, but it’s usually Vanguard funds that they’re really recommending — and those often have a minimum investment amount. You don’t have to have your IRA there to invest in their funds.
So if you don’t have $500 or $3000 or whatever a fund’s minimum investment amount is, just open the IRA itself first with what you do have.
In other words, instead of waiting around trying to get everything perfect — especially if you’re not setting aside money for retirement and don’t have a 401k at work — just open an IRA for as little as $1. It could be the nudge you need to get on track for retirement.Posted in Retirement on 02.27.13 with 2 comments.