Whether you have an employer-sponsored retirement plan or not, opening an individual retirement account (IRA) can help you boost your retirement savings. You can open a traditional IRA or a Roth IRA and choose from a wide variety of account providers, including banks and credit unions, brokerages and robo-advisors. This guide aims to help you determine what kind of IRA is right for your goals and then show you where to open an account.
Traditional IRAs and Roth IRAs are the two main varieties of individual retirement account. Which one you choose depends on when youâ€™ll need to start taking out money in retirement and certain tax considerations.
With a traditional IRA, contributions you make into the account are tax-deductible if you qualify, and money in the account grows tax-free over the years. The withdrawals you make in retirement are treated as taxable income. And required minimum distributions (RMDs) begin at 72 years of age â€” so whether you need the money or not, you must start taking minimum annual withdrawals from your traditional IRA.
Contributions to a Roth IRA are made after you pay income tax, and contributions are not tax-deductible. The money grows tax-free in the account, and withdrawals are free of income taxes in retirement. There are no required minimum distributions with a Roth IRA â€” you can even choose to leave the funds untouched in the account and bequeath them to your descendants in your will.
Deciding where to open an IRA depends on whether you are a hands-on investor or a hands-off investor.
If youâ€™re a hands-off investor, a good option would be to open an IRA with a robo-advisor. These low-cost, automated investing platforms assess your risk tolerance, determine your expected retirement age and ask other questions about your expectations. Your answers help the robo-advisor build a portfolio of investments tailored to your needs and goals â€” and once your portfolio is set up, the robo-advisor manages it for you. Savers with less investing knowledge and expertise can rely on a robo-advisor as a low-cost way to manage an IRA.
If youâ€™re a hands-on investor who wants to manage your own retirement funds, you should explore opening an IRA at an online brokerage. These conventional investing platforms let you select the securities and assets that make up your portfolio, which you actively guide through good market conditions and bad. It takes a little more time and effort, but those with skills and patience could yield higher returns.
As you go through the process of evaluating IRA providers, ask yourself these questions:
Very conservative investors should check out banks and credit unions, which offer IRA savings accounts and IRA CDs. These deposit accounts are ultra-safe but low-yield investments that receive Federal Deposit Insurance Corp. (FDIC) coverage. If you are comfortable with more risk and want higher yields from your IRA, choose a brokerage account. Brokers offer a variety of market-traded assets, like stocks and ETFs. If you have a moderate risk appetite, you can open an IRA with a broker and choose fixed-income investments.
Not all IRA providers have the same minimum investment thresholds. Robo-advisor Wealthfront has a $500 minimum balance requirement to open an account, while competitor Betterment has no minimum balance requirement. Some Vanguard funds require a minimum investment of $3,000. Personal Capital has a minimum investment threshold of $100,000.
Wealthfront and Betterment charge a percentage of the total amount in your account as their annual management fee. Other platforms, like Blooom, charge a flat annual management fee. With a flat fee, the fee is a bigger percentage of your total portfolio at the outset, when thereâ€™s less money in your account, and then it becomes a smaller percentage of the total portfolio as your investment amount grows.
With a fee based on the percentage of assets you have invested, the amount you are paying in fees grows in lockstep with your balance. If you open an IRA with a broker, you could end up paying little to nothing in fees, as many offer fee-free or very-low-fee mutual funds and ETFs â€” although youâ€™ll need to screen your investment choices yourself.
This comes down to what type of investor you are. Higher-risk securities include stocks and ETFs, while lower-risk choices include bonds and bond ETFs. Meanwhile, bank IRAs are virtually risk-free. Depending on your age and how much risk youâ€™re willing to take, you may end up having a mix of many different types of securities. To be safe, diversify your portfolio and manage your asset allocation accordingly. See which companies offer you the best mix youâ€™re looking for and which ones line up with your values and financial goals.
Nearly all IRA providers offer both traditional IRAs and Roth IRAs. Visit the website of your IRA provider of choice or download their mobile app, and complete the registration process.
With a broker, you will be asked to customize your own portfolio, although most brokers provide educational resources to help you choose. Younger investors usually choose riskier securities like stocks. The closer you are to retirement, the less risk you should take on, so choose more fixed-income assets.
Although some companies require an account minimum upon opening, youâ€™ll need to make regular contributions to see your IRA grow. You have the opportunity to fund your IRA a few different ways, including:
You can also have a mix of ways to contribute to your IRA. For instance, if you get a bonus at work and want to put it toward your IRA, you can make a one-time contribution on top of your regular payouts.