How to Select an IRA
Remember, an IRA isn’t a one-size-fits-all proposition., Open an IRA with a bank if security is your biggest priority., Use a traditional brokerage for the most flexibility., Go with a mutual fund for a middle-of-the-road approach.
Step-by-Step Guide
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Step 1: Remember
Just because a friend or family member of yours likes their IRA doesn’t mean it’s the right IRA for you.
Many IRAs have real advantages for certain types of customers that don’t apply to all customers.
Consider your situation and do your research before you make a commitment.Although there are many variables to consider, one big variable is age.
Older savers will generally want to transition into more conservative investment/savings strategies, while younger ones will be able to be more aggressive.
The reason is simple: time.
If a younger person loses their money, they have time to try and make it back, and can therefore afford to take more risk.
An older person doesn't have that same luxury, so they need to be more conservative with their money. -
Step 2: an IRA isn’t a one-size-fits-all proposition.
If you open an IRA with a bank, you’ll most likely open the IRA as a CD, or certificate of deposit.
A CD is a financial instrument functioning like an interest bearing account.
You purchase a CD from the bank, agree not to touch any of the money for an agreed upon amount of time, and once the term of deposit is finished, you can cash in your CD with a very moderate return.The drawback of a CD is the rate of return.
The interest on a CD is typically just a little higher than the interest on a savings account, and nearly any other kind of investment will provide you a higher rate of return.
Therefore, a saver in their twenties or thirties can probably forgo a CD as a primary retirement account as a consequence.
On the other hand, the deposit in a CD is FDIC insured.
That means the amount of your deposit is guaranteed by the US government, even in the event of a bank failure.
No other type of investment has such a guarantee.
Therefore, it would be wise for a retired person or an imminently retiring one to transfer at least some of their retirement savings into a CD.
That way, there's a guaranteed reserve. , Opening an IRA through a brokerage, like TD Ameritrade or Scottrade, will enable you to operate your IRA with the most flexibility.
You can put a mix of stocks, bonds, ETFs, or mutual funds in an IRA you open through a brokerage.
Nonetheless, brokerages often charge higher fees than other types of IRAs, so the flexibility needs to be something you’ll actually use to make it worth it.An ETF (exchange traded fund) is a lot like an index mutual fund, except it is sold on the stock market itself, like a share of Walmart or IBM.
So one ETF might be tied to an index, like the Dow, but instead of buying into a mutual fund, which would invest portions of your money in what it considers to be stocks representative of the Dow, the ETF invests in the index as a whole.
The ETF itself is bought and sold on the exchange, and rises and falls in value throughout the day, as opposed to a mutual fund, which has a value calculated at the end of the trading day.
While many ETFs are tied to an index, they can be tied to virtually anything, like real estate, currency, or bonds.
If you open your IRA through a brokerage, you can invest in mutual funds and ETFs from any company.
In contrast, IRAs purchased directly from mutual funds only offer a limited selection.
Since you can put stocks and bonds into a brokerage run IRA, you can customize your portfolio to an extent not possible with other sellers.
Therefore, IRAs with brokerages are probably better for active investors, wealthier investors, and investors with more sophisticated financial knowledge, who all tend to be mid to late career professionals. , Opening an IRA with a mutual fund is probably the best way to go if you are a less active, long term investor.
They have many of the same advantages as an ETF, such as being able to track a large swathe of companies instead of just one, without some of the drawbacks, such as trading fees (a fee for each time you buy or sell something within the IRA).While many mutual funds have minimum required investments—usually between $500 and $3000—to open an account with the fund, there are some that don't.
Betterment, for example, is a robo-fund (managed by computer algorithm and not a human) that has no account minimum.
Just keep in mind that nothing is free.
Many times, the lower the minimum, the higher the associated fees.
Mutual funds are typically best for investors who are learning about the market or investors who don't have the time or inclination to actively buy and sell on a regular basis.
That describes a lot of investors, which explains the popularity of the mutual fund. -
Step 3: Open an IRA with a bank if security is your biggest priority.
-
Step 4: Use a traditional brokerage for the most flexibility.
-
Step 5: Go with a mutual fund for a middle-of-the-road approach.
Detailed Guide
Just because a friend or family member of yours likes their IRA doesn’t mean it’s the right IRA for you.
Many IRAs have real advantages for certain types of customers that don’t apply to all customers.
Consider your situation and do your research before you make a commitment.Although there are many variables to consider, one big variable is age.
Older savers will generally want to transition into more conservative investment/savings strategies, while younger ones will be able to be more aggressive.
The reason is simple: time.
If a younger person loses their money, they have time to try and make it back, and can therefore afford to take more risk.
An older person doesn't have that same luxury, so they need to be more conservative with their money.
If you open an IRA with a bank, you’ll most likely open the IRA as a CD, or certificate of deposit.
A CD is a financial instrument functioning like an interest bearing account.
You purchase a CD from the bank, agree not to touch any of the money for an agreed upon amount of time, and once the term of deposit is finished, you can cash in your CD with a very moderate return.The drawback of a CD is the rate of return.
The interest on a CD is typically just a little higher than the interest on a savings account, and nearly any other kind of investment will provide you a higher rate of return.
Therefore, a saver in their twenties or thirties can probably forgo a CD as a primary retirement account as a consequence.
On the other hand, the deposit in a CD is FDIC insured.
That means the amount of your deposit is guaranteed by the US government, even in the event of a bank failure.
No other type of investment has such a guarantee.
Therefore, it would be wise for a retired person or an imminently retiring one to transfer at least some of their retirement savings into a CD.
That way, there's a guaranteed reserve. , Opening an IRA through a brokerage, like TD Ameritrade or Scottrade, will enable you to operate your IRA with the most flexibility.
You can put a mix of stocks, bonds, ETFs, or mutual funds in an IRA you open through a brokerage.
Nonetheless, brokerages often charge higher fees than other types of IRAs, so the flexibility needs to be something you’ll actually use to make it worth it.An ETF (exchange traded fund) is a lot like an index mutual fund, except it is sold on the stock market itself, like a share of Walmart or IBM.
So one ETF might be tied to an index, like the Dow, but instead of buying into a mutual fund, which would invest portions of your money in what it considers to be stocks representative of the Dow, the ETF invests in the index as a whole.
The ETF itself is bought and sold on the exchange, and rises and falls in value throughout the day, as opposed to a mutual fund, which has a value calculated at the end of the trading day.
While many ETFs are tied to an index, they can be tied to virtually anything, like real estate, currency, or bonds.
If you open your IRA through a brokerage, you can invest in mutual funds and ETFs from any company.
In contrast, IRAs purchased directly from mutual funds only offer a limited selection.
Since you can put stocks and bonds into a brokerage run IRA, you can customize your portfolio to an extent not possible with other sellers.
Therefore, IRAs with brokerages are probably better for active investors, wealthier investors, and investors with more sophisticated financial knowledge, who all tend to be mid to late career professionals. , Opening an IRA with a mutual fund is probably the best way to go if you are a less active, long term investor.
They have many of the same advantages as an ETF, such as being able to track a large swathe of companies instead of just one, without some of the drawbacks, such as trading fees (a fee for each time you buy or sell something within the IRA).While many mutual funds have minimum required investments—usually between $500 and $3000—to open an account with the fund, there are some that don't.
Betterment, for example, is a robo-fund (managed by computer algorithm and not a human) that has no account minimum.
Just keep in mind that nothing is free.
Many times, the lower the minimum, the higher the associated fees.
Mutual funds are typically best for investors who are learning about the market or investors who don't have the time or inclination to actively buy and sell on a regular basis.
That describes a lot of investors, which explains the popularity of the mutual fund.
About the Author
Frank Sanchez
Experienced content creator specializing in DIY projects guides and tutorials.
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