WHAT IS AN IRA?
Have you ever wondered how much you need to start an IRA? That’s often the first question when it comes to the consideration for an IRA. And it’s is indeed one of the rudiments when someone decides for or against an IRA. So, let’s talk about the basics first. Banks, IRAs, and savings accounts offer a way to save tax – preferential ways to save for retirement without hiding cash in a savings account. If you want to save for your retirement, you must be willing to open a bank account, an IRA, 401 (k), or another type of retirement savings plan.
How To Open An IRA Account
What Is An IRA?
An IRA (Individual Retirement Account) is a tax-advantaged investing tool that allows an individual to save for retirement with a tax-deferred or tax-free account. IRAs help an individual to achieve retirement saving goals. These accounts may seem very complicated, but the basics are straightforward to understand.
Who Does Fit In An IRA?
According to the Pew Charitable Trust, 33% of people working in the private sector don’t have any access to an employer-based plan. Thus, it leaves many workers on their own to save money for retirement. In such a situation, an IRA is a perfect tool for a start.
The government is providing you an opportunity to save for retirement through the tax advantages of IRAs.
Greg McBride, CFA, chief financial analyst
However, there are two major types of IRAs available to individuals.
1. Traditional IRA
In the Traditional IRA, the investment growth is tax-deferred and the contributions made are tax-deductible. So the individuals don’t need to pay taxes on the amount they put into the account. And when they withdraw money at retirement, they pay those taxes on the distribution.
2. Roth IRA
A Roth IRA provides an opportunity for investors to invest after taxes. There’s no tax deduction today, and the money begins to grow with no taxes in the account.
What Are The Common Ways To Get An IRA?
Opening an IRA account seems complicated, but the actual steps are easy to understand. You’ll need to visit the provider’s website and select the type of IRA (Traditional or Roth) that suits you best. You’ll need to fill in some of your basic details such as your date of birth, social security number, contacts, and employment information. There are two common ways to get an IRA.
1. Broker
An online broker is an excellent way to choose to start investing for yourself. (e.g. Merrill Edge)
2. Robo-Advisor
You’ll need to consider a Robo-advisor if you want to manage your retirement account. It provides services at a low cost and risks free investment for you. (e.g. Ellevest)
How Does It Work?
Here are the general concepts and critical characteristics of the IRA
IRA At The Bank, Broker, Or Robo-Advisor
The very first step is to open an IRA account at a bank, broker, or Robo-advisor. IRAs from banks provide saving accounts and certificates of deposit. And If you choose Robo-advisor or broker, you’ll also be able to invest your money in stocks and bonds
Invest In The Account
It allows you to invest your money in stocks, bonds, and many other assets, and when you consider a long-term investment like retirement, bonds and stocks can be a good choice because they often return a higher value.
Annual Contribution Limits
The two basic IRA types (traditional and Roth) allow you to contribute $6,000 a year in 2020 and 2021 (if you’re 50 or older, you’ve to add $7,000).
Withdrawal Rules
There are specific rules to follow, such as, if you withdraw money before age 59 ½, you’ll face a 10% penalty and a tax bill.
How Much Money Do You Need To Start An Ira
The amount required to start an IRA account depends on the type of retirement account you’re signing in. However, your initial payment may be as little as $100. Some providers don’t require an upfront investment, and few employer-sponsored plans offer flexibility for your retirement savings allowing individuals to make regular payments. Banks and other investment houses provide the most flexible terms for IRAs, while larger investment brokerage may need a significant upfront payment.
The amount required to start the Traditional IRA
Depending on the investment brokerage or financial institution that holds your account, the initial investment may range from $100 to $2,500. Individuals under the age of 70 ½ with earned income can add to a traditional IRA. You have to pay taxes from conventional IRAs up to annual contribution limits. For individuals under 50, the amount is $5000 and $6000 for those over 50. You have to pay taxes for these IRA earnings at the time of withdrawal, and penalties may apply if you’re going for an early withdrawal.
The amount required to start Roth IRA
This type of IRA provides tax benefits to investors. However, investors don’t realize these benefits until the time of distribution. Roth IRAs require a minimum of $2,500 to get started. Here the contributions you made are not tax-deductible within the same year you’ve contributed to the account. Just like traditional IRAs, there is a penalty on early withdrawals.
How To Choose An IRA Provider
If you’re confused about whether a Traditional or Roth IRA suits your lifestyle best, you can begin with this conversation by considering potential IRA providers. Different providers offer both types of funds, and companies should help you clarify your preference. Following are a few considerations you need to keep in mind when talking with the provider.
Investment Guidance
You’ll need to figure out if you’re good with managing your investments. You can do it yourself and invest your money in stocks, bonds, and mutual funds. However, if you find it challenging to manage your investments, a good rule of thumb is to have a professional portfolio financial manager working your assets for you. You can find the best IRA providers who offer those services as well.
Approach To Risk
Risk is one of the essential things that most investment planners explore with their clients. They determine the tolerance of their client for risk. Keep in mind that every investment involves risk. You’ve to be mentally prepared for any loss if the industries in which you’ve invested take a financial hit. However, greater risk also provides chances to bring higher returns than others. So if you’re comfortable with bolder investments, there are certain providers with more aggressive investments and fund managers that might suit your approach.
Charges
The fee structures of different IRA providers vary considerably. Some providers charge an annual fee, some charge for each trade or transaction, and others also provide a limited number of free services. Make sure to figure out each IRA provider’s fee structure you consider to fit your style.
Customer Support
Even experienced investors sometimes require some assistance from their providers. And new investors may need regular guidance to manage their investments. It’s crucial to accept help from your providers and understand the ways your providers deliver support. Some providers use a live phone to help you, but the good idea is to use a pool of representatives who regularly call up your account and sort out solutions for different issues.
High-Risk Involved In An Ira Account
Besides numerous advantages of an IRA account, there is also a high-risk involved in it. Equity investments such as real estate and stocks and particular debt securities are investments that might include higher risks. Such investments don’t offer any guarantees, you can also get a potential return, but they can lose your money.
According to the North American Securities Administrators, self-directed IRAs involve greater risk than others. The providers of these kinds of IRAs are free to have a broader range of investments than others.
The Bottom Line
If you open an IRA through a broker or investment fund company, you must decide how you want to invest your money. Suppose you already have a pension account sponsored by your employer, where your contributions are tax-deductible. In that case, a Roth IRA is a better vehicle for diversifying your tax exposure in retirement. You can also open a rollover IRA with the same brokerage firm that you have your 401 (k) from your old job or with another broker where they have an investment strategy similar to your traditional IRA, such as an investment fund company. If your income is high enough to deduct contributions to a traditional IRA, you can also qualify for an IRA.
