Investing in an IRA gives you the chance to put aside money today and have it grow into a nest egg you can tap in retirement. With a traditional IRA, you enjoy an up-front tax break, and you only pay taxes when the money is withdrawn in retirement. With a Roth IRA, you give up that immediate tax break, but you gain the promise of tax-free withdrawals when you retire. Choosing the right IRA means looking at your circumstances, as well as the number of years you have until you plan to retire.
Calculate the number of years you have until retirement, based on your age, how much you have accumulated in savings and when you will be eligible for Social Security payments. If retirement is still decades away, you can afford to be more aggressive with the type of IRA plan you choose. For instance, you might want to invest more in stocks and less in fixed income, then slowly adjust those percentages as retirement nears.
Compare the relative benefits of a Roth IRA versus a traditional one. If you have many years to go until retirement, a Roth IRA can be an excellent choice. The money in the Roth will have many years to grow and compound, and when you take the money out you pay no federal income taxes.
Contact several low-cost mutual fund companies and ask for prospectuses for their IRA plans. Review the prospectuses carefully, including any fees and charges. Some IRA plans charge an annual maintenance fee to offset expenses, while others waive that fee for investors who maintain a specified minimum balance.
Review the performance of the mutual funds you plan to use for your IRA account. Each prospectus should list the performance of the fund, along with the performance of a benchmark index. Be wary of funds that have consistently performed worse than the index. You can also choose an index fund for your IRA account, since this will lower your overall costs and eliminate the risk of under performance.
Check the minimum balance requirement for each IRA you are considering, especially if you are just starting out. Some IRA funds require a minimum balance to get started, and you will need to make sure you can meet that requirement.
Items you will need
- Mutual fund prospectus
- Jupiterimages/Comstock/Getty Images
- How to Set Up Pre-Tax IRA Deposits
- Traditional IRA Payouts
- The Advantages of Annuitizing an IRA
- How Can I Reinvest My TSP Tax-Free?
- Explain IRAs
- Can I Leave My Money in My Thrift Savings When I Retire?
- Can I Have an Early Distribution From My IRA Without Penalty if I Am Disabled?
- How to Buy a Roth IRA