What is an IRA account? It is a different kind of savings accounts for your retirement savings. IRA means “Individual Retirement Account” and this type of account provides many advantages tax-wise. There are two common types – Traditional and Roth IRA. There are certain limits for each type of IRA, but anyone can open an IRA account regardless of age. As long as you have an earned income you can open an IRA account. To know more about an IRA account and how to set up one, you can read more below.
What Is An IRA Account: A Simple Guide To IRA
1. Conduct Due Diligence
There are several ways to invest through the IRAs. They vary on the individual’s needs as well as the financial goals including the investing timeline. Each method also varies for every type of IRA. One way of doing your due diligence is to research all the rules about setting-up an IRA. It is not advisable to only have one source of your research. You can be prone to focusing on investment you know nothing about.
2. Know the Best IRA Type for you
Among the important details to look into when knowing what is an IRA account is identifying its different types. There are several types of IRA such as SEP IRA, Roth IRA, Traditional IRA, and SIMPLE IRA. Micro business owners and those who are self-employed can establish retirement plans such as SIMPLE and SEP IRAs.
The most common plans applied by individual taxpayers are Traditional IRAs and Roth IRAs. Both Traditional and Roth IRAs have the same maximum allowable annual contributions. This will vary depending on the age of the IRA holder. You can determine the permissible limit on contributions when the combination of all contributions to the IRA reached the limit.
How different are Traditional IRAs from Roth IRAs?
The differences between Traditional IRA and Roth IRA fall on restrictions for withdrawals, tax implications, and the criteria to qualify.
- Contributions and withdrawals
With Traditional IRAs, there is a potential for contributions to be tax-deductible. This will depend on the level of income, marital status, as well as the retirement plan. Contributions to Roth IRA, however, are not tax-deductible. There are cases though, such as post-tax dollars contributions where you can withdraw it free from taxes.
- Tax Implications
Traditional IRAs incur income tax payments on the funds invested upon withdrawal of the retirement money. On the one hand, Roth IRA requires tax payments now rather than upon withdrawal.
- Qualifying Criteria
A higher income may make you ineligible for Traditional IRA tax deductions for contributions. However, this will make you eligible for the Roth IRA.
3. Consider Different Investment Practices
There are 3 ways to invest in IRA such as mutual funds, banks, and brokerage accounts.
Banking is a safe way to invest since they have low to zero charge rates, especially for Certificate of Deposits.
- Mutual Funds
Another way is through mutual funds. This may be advisable for investors opening an IRA account who do not have an investing experience yet. Fund managers can do all the necessary research needed for you so you can proceed with the selection of stocks. By looking at the performance and charged fees, you can evaluate a mutual fund existing for 5 years and more.
- Brokerage Accounts
As for brokerage accounts, there is an option to open one online account allowing the opportunity to manage your own investments including trades which are low-cost.
4. Account Set Up and Profitability Option
Opening an IRA through a brokerage is best suited for experienced investors who have enough investing knowledge. This allows handling of investments on your own from a selection of stocks, other financial investments, and funds.
The process starts by setting up an online IRA account in your preferred institution. Proceed by downloading and filling out an application form. Upon completion, you can now send the filled-out form along with the initial investment check via mail. The minimum investment required for mutual funds is often $1000. However, for banks, they sometimes required just $100. For those who are over 50 years old, the contribution limit is currently $6,500, and for those who are under the age of 50, it is currently $5,500 annually.
5. Manage Record Keeping
This is the documentation of all transactions in your IRA. It is equally important to keep every receipt and other pertaining documents needed for filing taxes every year. These documents can be trust records which are balance sheets, statements of investment, and income statements. Other documents include approval letters, other related contracts, and notices. Keep the documents and all records for as long as you’re making contributions for your IRA.
Time is of the essence when it comes to setting up an IRA. The earlier you open an IRA account, the sooner the earnings will accumulate in your investment nest. It is best to thoroughly familiarize yourself with all the critical information regarding what an IRA account is all about. This will allow more possibilities in choosing the right investment approach for your financial needs, goals, and timeline. It will also help in building a diverse retirement portfolio for all your IRA. Moreover, it is essential to check and compare the different fees of different potential institutions for your IRA to maximize earnings.
What is an IRA account that works best for you? Do share your suggestions in the comments section below.