Today's post inspiration comes from my friend Melanie.  She texted me the other day asking about the best place to open an IRA.  Her current employer offers a 401k, but they don't start matching until you've been working for 2 (!!!) years, and she doesn't think she'll be there that long.  So she wanted to start her own IRA!  

 

I had to do a little digging around because I literally had NO IDEA what to tell her about IRAs.  When I was working, we had an official 401k with matching so I took advantage of that.  I didn't have to look into it on my own!

 

I sent her an email with my findings, and figured I'd share the info with you, too... just in case you're in her situation!

 

 

What is an IRA?

First things first... let's make sure we all know what an IRA actually is.

 

An IRA (Individual Retirement Account) is a retirement account that you open yourself.  A 401k is a retirement account that you open through your employer.  That's literally the only difference.

 

With both accounts, your contributions each month are being invested.  With an IRA, you can usually choose to invest in stocks, mutual funds, bonds, and certificates of deposit.  With a 401k, you might be offered a more limited number of investments (only certain stocks and mutual funds, for example).

 

As with a 401k, there are two types of IRAs:  traditional and Roth.

 

In a traditional IRA, you deposit money tax-free*.  You only pay taxes when you withdraw the money in retirement.

With a Roth IRA, you are depositing after-tax money, but then you don't have to pay taxes when you withdraw the money in retirement.

 

There are advantages and disadvantages to both traditional and Roth IRAs- I won't get into those here but just do some homework before you choose which one you'd like to invest in.

 

Also, there is a limit to how much you can invest in an IRA each year.  For 2013 and 2014, the maximum amount you can contribute is $5,500 per year.  (If you contribute over that limit, you'll be hit with a 6% penalty.  So keep good track of your contributions!)

 

* For those who do have an employer sponsored 401k option through work, you have to jump through a few other hoops to ensure your contributions can be claimed on your taxes.  (I guess this is to make sure people use their employer's 401k?)  Check out this page on the IRS website to be sure you meet all qualifications to claim the amount on your taxes.  Basically your income has to be below a certain level to be able to claim full deduction.

 

Where can I get an IRA?

For the most part, where you get your IRA is a personal preference.  Most of the big-name providers seem pretty equally priced.  If you really like a certain company (like me with my Vanguard love affair) then absolutely go with them!

 

But a few things to take into consideration...

  • Is there a minimum initial investment or minimum contributions?  Some companies want you to deposit $1,000 to start, or deposit at least $100 each automatic contribution.
  • What kinds of fees will be charged to the account?  Think annual maintenance fees (usually some percentage amount), fees to deposit money, etc.
  • Can you do automatic contributions?
  • What can you invest in?  Do they offer stocks, bonds, mutual funds, etc?
  • How legit is the IRA provider?  You probably don't want to choose a company that you've never heard of... this is your money for retirement, after all- make sure they'll still be around in 40+ years!
  • If you get a job with a 401k later, can you transfer the money out of your IRA and into the 401k?

 

I found this handy article detailing some of the biggest and most popular IRA providers. (ignore the fact that the article is written specifically about Roth IRAs- I think it applies to traditional IRAs too)  Take a look over there and see if any of those companies work for you!

 

Whoever you choose, when you sign up for the account, I suggest you keep it easy and just go with a mutual fund.  It's tough to choose good stocks- it's way easier to just pick a mutual fund and go with it!  (and most of the providers on that list offer no-fee mutual fund transactions)  But you do whatever makes you happy :)

 

 

PHEW.  That was quite the post for a Friday morning, I know.  Sorry that I probably just made your brain hurt.

 

 

Do you have an IRA?  Which provider did you choose?