There are a lot of reasons to open an individual retirement account (IRA). If your employer doesn’t offer a retirement plan, offers lousy investment choices, you’ve maxed out your 401(k), or simply want greater control over your retirement savings—an IRA is for you.
Anybody under age 70 ½ who is earning an income can open an IRA. You can choose between a traditional IRA and a Roth IRA. Which one you choose depends on your income and the tax bracket you predict you’ll fall into in retirement.
Roth vs. Traditional
If your adjusted gross income is less than $116,000 and you expect that you’ll be taxed at a higher rate when you retire, you should think about opening a Roth IRA. Money you invest in a Roth IRA is not tax deductible now, but the funds you withdraw in retirement will be tax-free.
If you think you’ll pay less taxes in retirement, then think about a traditional IRA. The contributions you make are tax deducible now, but you’ll pay taxes when you take the money out in retirement.
The maximum you can contribute to either a Roth IRA or traditional IRA is $5,000 this year for everybody 50 and younger.
Where to Open an Account
Don’t delay opening an account just because you’re not sure where to start, or where to invest. You can open an IRA almost anywhere that offers banking or investments, but online brokers are a great place to open an IRA. Many don’t have minimum required account balances or opening deposits on IRA accounts, and you can start buying investments for between $5 and $15 a trade, depending on the broker.
For newbie investors, exchange traded funds (ETFS) and no-load mutual funds provide an easy way to start a diversified portfolio at lost cost and with just a few trades. To get started, research funds for free with Morningstar.