Starting an IRA
|Retirement Planning 101|
Starting an IRA
I want to start an IRA account but I don't know anything about it. I am 29 years old and have no kind of savings for retirement. I don't know if I should get into money market accounts, CD's or an IRA. Any suggestions?
Start With Mutual Fund Sites
For lots of free information on IRAs, and pretty good plans too for a small account, contact major mutual fund companies such as T. Rowe Price (www.troweprice.com) or Vanguard. (www.vanguard.com). These companies let you choose to put your IRA into money market funds, and lots of choices for conservative investing. The web sites are worth a read. They have interactive calculators to help you figure out what sort of IRA would be a good deal for you.
You can get other ideas for IRAs by reading magazines at your library, such as Money magazine or Kipingler's Personal Finance.
Remember, although the law lets you put $2000 a year into an IRA, you don't have to put the whole $2000 in if you can't afford it. It's better to put whatever you can into the account each year than to skip a year's contribution because you think you can't afford it. Some folks get to deduct their IRA contribution from their income tax; this is a great deal if you qualify. You can call the IRS for a free, informative booklet on whether you qualify.
Consider a Roth
My suggestion is a Roth IRA with an aggressive "no load" mutual fund that allows you to start with little or no money "up-front" (you must allow the mutual fund company to take funds automatically each month from your checking account in lieu of the initial minimum amount to start the fund).
The Roth IRA has the advantage of allowing you to withdraw your money tax free when you turn 59 and 1/2. You can also get your original investment out if you are really stuck with no tax liability.
The aggressive fund will make more money for you over the long run (especially if you will not be touching the money for 30 years).
"No load" means no sales charges (also don't participate in a fund that has "12-1-b" charges) to reduce the amount of money that is invested for you.
Having the mutual fund take money automatically from your checking account will "force" you to keep putting money into your IRA (if you don't see it, you are less likely to spend it on something else). Look at it the same way you look at paying the mortgage or car payment.
There are many things to consider. An IRA can be a good way to start, consider the Roth IRA for your age, though. It will give you the opportunity to use the funds after 5 years for a 1st time homebuyer program or education, etc. And, while it isn't tax deductible or deferrable, it can be a bonus at retirement time because you won't have to pay taxes on it when you withdraw it after age 59 1/2. And, remember that you can only put away $2000/year in an IRA.
If you work for a company that offers the 401K program, be sure to take advantage of it. Talk with them, you may also be able to put money in an IRA after participating in the 401K. Check with a customer service rep at your local bank for IRA info as well as CD and money market info. Your bank may have an investment center or know of one to refer you to. Personally, I believe that you should ask for references unless you know the investment service personally or a reliable friend has referred them to you. There are things to consider such as their fees, service charges, etc. They will be able to help you with CD's and money markets and mutual funds as well.
Don't look at it as a big monster! I work for a bank as a customer service rep....felt intimidated at first, but now love it. Just like you, I find that there are always new things out there to learn about!
Take Long Term Approach
An IRA by definition is an investment you should be willing to not touch until at least age 59 1/2 because of the penalties involved. Based on this you would have 30 years minimum to grow your investment. With this kind of timeline you could likely afford to put your IRA in mutual funds if you are willing to accept a certain level of risk. Historically the stock market tends to have better returns over time than CD's or money market accounts.
The down side is that mutual funds is that they are not FDIC insured as the other investments are. Mutual funds may also be the vehicle of choice if you are planning to contribute monthly to your IRA to take advantage of dollar cost averaging i.e. when the stock market is down you aren't making money possibly but your monthly contributions are purchasing shares at a cheaper rate giving you more bang for your buck when share prices go back up.
Its never too early to start thinking about saving for retirement. Since you are young (29) you have a great advantage...time. Money market accounts and CD's are fine for "ready cash", but for retirement savings I would recommend an IRA. Your next step is to learn/decide what type of equity exposure you would like i.e.. large-cap, mid-cap, small-cap, foreign exposure, index investing, etc. If you are confused (who isn't) you could always invest in an index fund that follows the S&P 500 to get started. When you become more knowledgeable you can then invest in other areas. Check out http://www.financiallearning.com for basic information regarding finance.
In spite of what you have seen or heard over the last few weeks regarding the volatility and speculative nature of the equity markets, investing in equities (stocks or stock mutual funds) is the only way to save for one's retirement. The stock market has historically returned approximately 9-10% on average. That's not to say there have not been down years, but with long time horizons the momentary dips like we have seen recently are insignificant. Your money will be compounding tax free for the next 36 years (or more), that's the secret to having a retirement nest egg.
Instead of Starting an IRA, Fund a 401k
Before funding an IRA, does your employer provide a 401K where you make pretax contributions to the 401k and often, the employer matches some of your money? The 401k should be fully funded first if it is available. If you have no 401k available or you've fully funded it for the year, then by all means look into an IRA. We should all take responsibility for our financial futures and even if you can't afford to contribute the full amount allowed, you would be amazed at how your money will grow over the years.
What many people do not understand is that an IRA is simply a name for an account with special tax considerations. You may buy CD's, money market funds, mutual funds, stocks and bonds and have that portfolio all fall under the same IRA.
When just starting out, I would recommend keeping it simple and just contributing to one or two mutual funds within an IRA. If you are unfamiliar with the stock market, let someone else manage the money. Definitely get a stock fund if you have many years before retirement. And watch out for expenses, which are defined in the prospectus you will receive with the forms to start the account (or you can get this info on the websites). Lower expenses mean more money stays in your portfolio. Vanguard is known for having low expenses and I've done quite well with two of their funds.
So learn what you can, always read over the prospectus before investing, and if you do not understand something call the customer service number of the brokerage(s) you are considering. The folks who work there are happy to help and you shouldn't feel embarrassed to ask for help. No one is born knowing this stuff.
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