Finance Globe
U.S. financial and economic topics from several finance writers.
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Where You Can Open Your IRA
Ready to open your IRA?
So, you've reduced your debts to a level you can pay off every month. You've saved a few month's worth of living expenses for emergencies. You've done a little research and learned the benefits of opening your IRA as soon as possible. Okay, you're ready to open your IRA. So, now what?
First of all, I want you understand that an IRA is not a type of investment; it is a type of account made specifically for retirement savings, and your investments will be held within that account. You have to set up your IRA account first, and then you can choose the type of investments that you want to put your retirement money into. Your investment will grow, with the tax benefit that the IRA offers. The tax benefit you'll get depends on whether you choose a Roth IRA, which offers tax-free growth, or the Traditional IRA, which offers tax-deferred growth.
Where you go to set up your IRA will depend on what type of investment you plan on choosing for your IRA. You should consider your time-frame to retirement when deciding what type of investment to go with. A person who has 10 to 15 or more years to retirement can afford to invest more aggressively, and therefore can afford to take more risk to get a better return. A person who has less than 10 years to retirement should be more concerned with the preservation of capital, with growth taking a back seat to safety.
A no-load mutual fund is a great starting point.
A mutual fund or two is a great way for the beginning investor to start, preferably a no-load mutual fund. You can go to any mutual fund company, but I recommend choosing a company that offers several funds that interest you. When you expand your portfolio someday and invest in non-IRA accounts, it will be easier to manage your investments if they are all with the same fund family. If you ever want to buy individual stocks or funds from other companies, you can still do that through your fund company with a brokerage account. You will be assessed a sales charge that may be a little higher than that of a discount broker, but you might feel that it's worth it for the convenience of all your investments being in one place.
Fidelity, Vanguard, and T. Rowe Price all offer a wide variety of no-load funds, and even some that are made just for IRAs. Whether you plan to invest aggressively or conservatively, you can find a mutual fund with low expense ratios, no sales charges, and competitive returns with any of these three guys. You can choose a fund that invests in growth stocks, bonds, or even the money market. They'll have minimum account balance requirements of $1000 or more, but low balance fees will probably be waived if you set up automatic monthly investments.
I, personally, have my IRA in Fidelity's Freedom 2035, since I plan on retiring around that year. Freedom 2035 is heavy in stocks and light on bonds now, and will gradually shift to more conservative investments, like bonds and the money market as it gets closer to my target retirement date. I never have to worry about re-balancing my portfolio to ensure proper asset allocation; the fund automatically does it for me. They have other Freedom Funds, and each individual can choose the fund that is geared towards their target retirement date. I have been happy with my account at Fidelity, but Vanguard and T. Rowe Price both offer similar target-date IRA funds, so go with who you like best.
If you want service, you'll have to pay for it.
You can also open an IRA with a stockbroker, financial advisor, or insurance agent if you want to invest in stocks or mutual funds. This may be an option if you really feel you need guidance in your investments, but expect to pay extra for that service in the form of commissions and, possibly, account service fees. That's how those guys earn a living. Also, keep in mind that there may be a conflict of interest if they depend on commissions for their bread and butter. They may be more likely to recommend investment products that give them a better payout before they advise you to do what is really best for your overall financial picture.
If you plan on doing a lot of stock trading, and are willing to do the investment research yourself, an on-line discount broker may be an option. You'll pay a fee-per-trade that's probably lower than what a mutual fund company would charge for brokerage services. I do want to warn you about individual stocks if you are new to investing; they are much more volatile and risky than mutual funds. While I'm not saying that individual stocks have no place in your retirement portfolio, I am saying that you should start off with a balanced investment portfolio. Would you really feel safe if your retirement depended on the success or failure of one company? It would be better if you got a mutual fund first, and then added individual stocks later, when you have more investment experience.
Safety costs you - in the form of lower returns.
You can also open an IRA with your bank or credit union, but they are often limited in the types of investments that are available. Many financial institutions only allow the purchase of CDs for your IRA. A CD has no market risk, and it would be FDIC or NCUA-insured, up to $100,000. With this safety, you'll miss out on potential earnings; the rates you earn on a CD won't even come close to what you could be earning with other investments, and may barely even keep up with inflation. This may be an option if you can't, or won't risk your money in the stock market; retirement may be so close that you want to ensure that your investment doesn't lose value.
If you have enough time to recover from market fluctuations before retirement, I highly suggest investing more aggressively than bank CDs. Even if you're closer to retirement, say less than ten years, you have better choices available than most banks offer. A mutual fund that invests in high-quality federal government bonds will normally give you better returns than the bank and is less risky than the stock market. Also, a money market fund, which is different from a money market account, is another fairly low risk investment that will normally earn more than a bank CD.
My credit union offers limited brokerage services and a small choice of mutual funds that could be used for an IRA, but they come with some expensive sales charges, or loads. I spoke with the investment counselor about them long enough to realize that he was only pushing those funds because it put money in his pocket. That's when I decided to go with a no-load mutual fund company; I'd rather put my money to work for me before I paid somebody else's commission.
Real estate in an IRA?
Real estate is another option for an IRA, though it's actually quite complicated. It's so complicated that many people don't even know about it, and very few actually do it. To invest in real estate through your IRA, you must utilize the services of an independent IRA custodian that allows real estate investments. You, your spouse, parents or children cannot have ever owned the property, and it cannot ever be sold to any of those people while the property is an investment in the IRA. You cannot live in, lease, or take possession of, the property while it is an IRA investment. All transactions concerning the property (maintenance, rent, property tax payments, and the like) must be carried out by the custodian through the IRA; if you do anything yourself, you could be penalized and lose the IRA tax benefits.
The neat thing about investing in real estate for an IRA is that you can take possession of the property at age 59 1/2 and live in it as a vacation home or second home, which may make this an ideal way to secure your dream home in paradise for your golden years. There are so many other details involving real estate IRA investments, look into it carefully before you choose this investment for your IRA; it's definitely not for everybody. Even if it is something you want to eventually consider, it's more likely to be an option when you have enough funds in your IRA to purchase a property, since the purchase of a leveraged property is limited. Nonetheless, know that it is an option, and may provide you with some diversification in your IRA investments at a later date.
Sources:
www.realtor.org
www.fidelity.com
So, you've reduced your debts to a level you can pay off every month. You've saved a few month's worth of living expenses for emergencies. You've done a little research and learned the benefits of opening your IRA as soon as possible. Okay, you're ready to open your IRA. So, now what?
First of all, I want you understand that an IRA is not a type of investment; it is a type of account made specifically for retirement savings, and your investments will be held within that account. You have to set up your IRA account first, and then you can choose the type of investments that you want to put your retirement money into. Your investment will grow, with the tax benefit that the IRA offers. The tax benefit you'll get depends on whether you choose a Roth IRA, which offers tax-free growth, or the Traditional IRA, which offers tax-deferred growth.
Where you go to set up your IRA will depend on what type of investment you plan on choosing for your IRA. You should consider your time-frame to retirement when deciding what type of investment to go with. A person who has 10 to 15 or more years to retirement can afford to invest more aggressively, and therefore can afford to take more risk to get a better return. A person who has less than 10 years to retirement should be more concerned with the preservation of capital, with growth taking a back seat to safety.
A no-load mutual fund is a great starting point.
A mutual fund or two is a great way for the beginning investor to start, preferably a no-load mutual fund. You can go to any mutual fund company, but I recommend choosing a company that offers several funds that interest you. When you expand your portfolio someday and invest in non-IRA accounts, it will be easier to manage your investments if they are all with the same fund family. If you ever want to buy individual stocks or funds from other companies, you can still do that through your fund company with a brokerage account. You will be assessed a sales charge that may be a little higher than that of a discount broker, but you might feel that it's worth it for the convenience of all your investments being in one place.
Fidelity, Vanguard, and T. Rowe Price all offer a wide variety of no-load funds, and even some that are made just for IRAs. Whether you plan to invest aggressively or conservatively, you can find a mutual fund with low expense ratios, no sales charges, and competitive returns with any of these three guys. You can choose a fund that invests in growth stocks, bonds, or even the money market. They'll have minimum account balance requirements of $1000 or more, but low balance fees will probably be waived if you set up automatic monthly investments.
I, personally, have my IRA in Fidelity's Freedom 2035, since I plan on retiring around that year. Freedom 2035 is heavy in stocks and light on bonds now, and will gradually shift to more conservative investments, like bonds and the money market as it gets closer to my target retirement date. I never have to worry about re-balancing my portfolio to ensure proper asset allocation; the fund automatically does it for me. They have other Freedom Funds, and each individual can choose the fund that is geared towards their target retirement date. I have been happy with my account at Fidelity, but Vanguard and T. Rowe Price both offer similar target-date IRA funds, so go with who you like best.
If you want service, you'll have to pay for it.
You can also open an IRA with a stockbroker, financial advisor, or insurance agent if you want to invest in stocks or mutual funds. This may be an option if you really feel you need guidance in your investments, but expect to pay extra for that service in the form of commissions and, possibly, account service fees. That's how those guys earn a living. Also, keep in mind that there may be a conflict of interest if they depend on commissions for their bread and butter. They may be more likely to recommend investment products that give them a better payout before they advise you to do what is really best for your overall financial picture.
If you plan on doing a lot of stock trading, and are willing to do the investment research yourself, an on-line discount broker may be an option. You'll pay a fee-per-trade that's probably lower than what a mutual fund company would charge for brokerage services. I do want to warn you about individual stocks if you are new to investing; they are much more volatile and risky than mutual funds. While I'm not saying that individual stocks have no place in your retirement portfolio, I am saying that you should start off with a balanced investment portfolio. Would you really feel safe if your retirement depended on the success or failure of one company? It would be better if you got a mutual fund first, and then added individual stocks later, when you have more investment experience.
Safety costs you - in the form of lower returns.
You can also open an IRA with your bank or credit union, but they are often limited in the types of investments that are available. Many financial institutions only allow the purchase of CDs for your IRA. A CD has no market risk, and it would be FDIC or NCUA-insured, up to $100,000. With this safety, you'll miss out on potential earnings; the rates you earn on a CD won't even come close to what you could be earning with other investments, and may barely even keep up with inflation. This may be an option if you can't, or won't risk your money in the stock market; retirement may be so close that you want to ensure that your investment doesn't lose value.
If you have enough time to recover from market fluctuations before retirement, I highly suggest investing more aggressively than bank CDs. Even if you're closer to retirement, say less than ten years, you have better choices available than most banks offer. A mutual fund that invests in high-quality federal government bonds will normally give you better returns than the bank and is less risky than the stock market. Also, a money market fund, which is different from a money market account, is another fairly low risk investment that will normally earn more than a bank CD.
My credit union offers limited brokerage services and a small choice of mutual funds that could be used for an IRA, but they come with some expensive sales charges, or loads. I spoke with the investment counselor about them long enough to realize that he was only pushing those funds because it put money in his pocket. That's when I decided to go with a no-load mutual fund company; I'd rather put my money to work for me before I paid somebody else's commission.
Real estate in an IRA?
Real estate is another option for an IRA, though it's actually quite complicated. It's so complicated that many people don't even know about it, and very few actually do it. To invest in real estate through your IRA, you must utilize the services of an independent IRA custodian that allows real estate investments. You, your spouse, parents or children cannot have ever owned the property, and it cannot ever be sold to any of those people while the property is an investment in the IRA. You cannot live in, lease, or take possession of, the property while it is an IRA investment. All transactions concerning the property (maintenance, rent, property tax payments, and the like) must be carried out by the custodian through the IRA; if you do anything yourself, you could be penalized and lose the IRA tax benefits.
The neat thing about investing in real estate for an IRA is that you can take possession of the property at age 59 1/2 and live in it as a vacation home or second home, which may make this an ideal way to secure your dream home in paradise for your golden years. There are so many other details involving real estate IRA investments, look into it carefully before you choose this investment for your IRA; it's definitely not for everybody. Even if it is something you want to eventually consider, it's more likely to be an option when you have enough funds in your IRA to purchase a property, since the purchase of a leveraged property is limited. Nonetheless, know that it is an option, and may provide you with some diversification in your IRA investments at a later date.
Sources:
www.realtor.org
www.fidelity.com
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