How to Start an Individual Retirement Account
Opening an IRA : Five Steps Involved in Setting up an IRA Account
Apr 21, 2009
Starting an IRA account involves five main steps- choosing the type of IRA, matching the eligibility criteria, laying out an investment strategy, choosing the right type of provider and finally establishing the IRA account.
Choosing the Type of IRA
Most people, if they are not looking for employer provided plans, choose between a Traditional and Roth IRA. There are a number of important differences between both the type of accounts and choosing between the two plans requires a great deal of consideration. To read more about the differences between Traditional and Roth IRAs read ' Traditional or Roth IRA?'
Eligibility Criteria
Any person who has taxable compensation can start an IRA account. A traditional IRA account has an additional constraint that only an individual whose age is less than 701/2 is allowed to start a traditional IRA account.
Any person regardless of his age can start a Roth IRA account but his taxable compensation must be below:
- $169,000 for married filing jointly or qualifying widower
- $116,000 for single, head of household, or married filing separately and he did not live with his spouse at any time during the year
- $10,000 for married filing separately and he lived with his spouse at any time during the year.
Investment Strategy
Investment strategies differ for different people, some are averse to risk while others prefer to take risk in order to get higher returns. Whatever the investment strategy, it is always a good idea to diversify the investments.
Investing for retirement is a long term goal, so taking reasonable risk is advisable. Stocks have historically produced better results than bonds and money market instruments so a good part of the investments can be in stocks. The percentage of stocks in the portfolio should go down as the IRA holder approaches his retirement.
Choosing the Right Provider
Banks, Mutual fund companies, brokerage firms and insurance companies provide services for opening an IRA account. Selection of a particular provider will depend largely on the size of the account and the investment alternatives that are required by the individual opening the account.
- Commercial banks, credit unions etc. These are appropriate for small accounts as they accept small amounts and the procedures involved are much more simple. However they may not provide the kind of flexibility that a mutual fund company or a brokerage firm offers.
- Mutual fund companies. They provide a wide range of investment alternatives. There are different types of funds available and it is also easier to switch from one fund to another when the investment objectives change.
- Brokerage firms. These are best suited for do-it-yourself type of people, who want to design their own portfolio.
- Insurance companies. Insurance companies also offer Roth IRA accounts. They offer annuity investments which are contracts with insurance companies that promise to make a stream of payments.
Establishing the IRA Account
Starting the IRA account is relatively easy compared to the earlier steps. The only procedures involved are going to a provider of choice, filling out a few forms and writing a check. Some providers even provide account opening services over the Internet.
Sources: Go Roth book by Kaye A. Thomas (Published by FAIRMARK PRESS INC, 2008) and Publication 590 of IRS.
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