Demystifying IRAs

The basics of opening an IRA are simple in theory:

  1. Decide which type of IRA you want and qualify for (Traditional or Roth, if any — making sure you are under the IRA contribution limits)
  2. Choose a trustee
  3. Fill out some application forms
  4. Choose what you want to invest/save your money in
  5. Start sending money in — up to the applicable contribution limit or what works best in your situation.

In practice though, there’s a little more to it than that. In fact it’s common to be confused about just what an IRA is exactly.

Build your nest eggWhat an IRA is and is not

TLet’s start with what an IRA is NOT: An IRA is not stocks, mutual funds, index funds, real estate, money market funds, CDs, or cash. It’s not any sort of investment type at all.

And now for what an IRA IS: An IRA is a way of characterizing your retirement money. In other words, it’s a little bit like slapping a “this money is set aside for retirement” label on it (for tax purposes) to distinguish it from your other investments. IRA stands for Individual Retirement Arrangement, and Publication 590 from the IRS goes into great detail about the nitty gritty.

Let your funds heat up

I like to think of an IRA as being like a big pot on the stove, with the investments I choose to put into my IRA as the ingredients in the pot that simmer over time.

You want to use a good pot — often a brokerage firm, investment firm, or bank — that has low or no maintenance fees (and low trading commissions, if you’ll be buying shares of stocks or mutual funds) and is reputable. Do your research to be sure you understand what you’ll be charged and what investment options are available.

You also want to choose good investments. These investment “ingredients” could be stocks, mutual funds, real estate, etc. (There are some restrictions on what your IRA can be invested in, and if you invest in real estate there are special considerations.)

If you qualify, an IRA can be an important part of funding retirement. So don’t let the mumbo jumbo stop you from funding your retirement account. Get started today.