How to open an IRA

Get the Right IRA: What Investments, Services & Advice Do You Need?

• How Will You Invest? If you want to invest your retirement savings in stocks, bonds, or mutual funds, you need a “securities” firm. If you want to put your retirement savings in a bank Certificate of Deposit, you need a bank. Both are available online or in your neighborhood. Note that holding a Certificate of Deposit or some mutual funds will limit your ability to shift your savings to another provider.
• Will You Need Advice? How much and what type will you need? It’s worth checking out the advice offered by different providers to learn what’s available. But know that most people rarely change their initial investment decisions, even when they should. So consider how much and what type of advice you will actually use.
• What Other Services Are Offered? If it’s important to you, consider how the provider presents your financial information and how easily you can read it, how easily you can manage your investments, and how easily you can transfer money.
• Is the IRA Insured? Be sure your provider is insured by the appropriate government agency. Note that the agency insures the value of your savings if your savings are in a bank. If your savings are with a securities firm, the agency ensures that your securities, not their value, are safe.

Mutual Fund Fees Are Typically Your Biggest Expense.

If you invest your IRA savings in mutual funds, the fees mutual funds charge (typically a percentage of the savings invested in the fund) vary widely. Fees can be 0.2% or less or well over 1% per year. And the fees you pay are very important.

You can contribute up to $5,500 a year, less any contributions to 401(k)s and 403(b)s, if you earn that much from work. If over 50, you can contribute an additional $1,000. If over 70½, you can’t contribute.

• Contributions are only partially deductible if your “adjusted gross income” in 2014 is over $60,000 if single, or $96,000 if married and filing jointly. They’re not deductible at all if your “adjusted gross income” is over $70,000 or $116,000. (These limits change every year.)

Before age 59 ½, withdrawals get hit with a 10% “penalty tax” except:

• Up to $10,000 for a first-time home purchase.
• “Qualified” college expenses for you, your children, or grandchildren.
• “Qualified” medical expenses greater than 7.5% of “adjusted gross income” or the cost of medical insurance if unemployed.
• For disabled individuals.

Beginning at age 70 ½, you must make “Required Minimum Distributions” – so the government can finally tax that money.

• “Required Minimum Distributions” are set percentages of the savings in your IRA based on age, rising from 3.6 percent in the year you turn 70 ½ to 11.6 percent by the time you’re 95.
• Note that you don’t have to spend what you take out after paying the tax. You could also save the after-tax amount.

The contribution limits are the same as in Traditional IRAs.

• But less if your “modified adjusted gross income” in 2014 is over $114,000 if single, or $181,000 if married and filing jointly. And contributions are not allowed if your “modified adjusted gross income” is over $129,000 or $191,000. (These limits change every year.)

Before Age 59 ½

• You can withdraw your contributions without paying tax (just contributions, not any interest, dividends, or capital gains). This feature can make a Roth more attractive than a Traditional IRA.
• Withdrawals greater than contributions get hit with a 10% “penalty tax”, with the same exceptions as in a Traditional IRA.

After age 59 ½, all withdrawals are free of tax.

Here is a video from Khan Academy that explains in more detail how an IRA works: