IRAs for Beginners

What is an IRA?

An Individual Retirement Account (IRA) is an account that allows you to save for retirement with substantial tax benefits. The account holds investments of your choice, such as stocks, CDs, mutual funds, money market funds, and other investments. Remember, the IRA is not an investment itself, it is an account that holds investments allows you to make smart decisions with your money.

What is a Roth IRA?

The main advantage of a Roth IRA, versus a traditional IRA, is that you use after-tax money to fund your account, so when you reach retirement age you will not have to pay any taxes on the withdrawals.

What is a Traditional IRA?

With a traditional IRA, your receive an up-front tax deduction on the money you use to fund the account, but you will have to pay taxes when you make withdrawals during your retirement years.

Which is better for me?

For most people, a Roth IRA is the better choice. Major differences between the two types do exist, so in order to get the best advice for your particular situation, talk to a financial and tax adviser.

Where can I open my IRA?

IRA's can be opened at traditional brokerage firms such as Smith Barney, Charles Schwab, and Edward Jones; or at online brokers like Scottrade, ETrade, and Ameritrade. In addition, many mutual fund companies including TRowe Price and Vanguard will allow you to open IRAs directly, as will most banking institutions.

Take note, banks that do not offer brokerage services will not give you the option to invest in stocks and mutual funds, so your investment choices will be limited with such institutions.

Also, while you can open multiple IRA accounts at different banks and brokerages, you have to keep track of how much you put in each one each year and make sure the combined amount doesn’t exceed the IRS contribution limit for each tax year. ($4000 as of 2007.)

Will I be charged fees?

Most likely, yes. Many institutions charge an annual fee of $30 to $50, but this can vary widely, so shop around.

Questions to ask when opening an IRA:

What is the minimum initial investment?
What are the minimum contributions?
Are automatic contributions offered?
What are the fees charged?
What financial instruments are available to invest in? (CDs, Stocks, Bonds, Mutual funds, etc.)