How to open an IRA
Investors who want to make the best decision for will be required to do some research, decide on an IRA and decide what entity will hold the account - a bank, a mutual fund or a brokerage account.
To get the best return on investment, the investor needs to decide what kind of risk tolerance he or she has.If the future retiree doesn't want to have even the slightest possibility that the investment will lose money, he or she can invest some really safe IRA options - usually through a banking institution.
Someone who isn't really interested in risk factors and has experience investing in stocks and bonds, a brokerage account offers the possibility of greater returns with greater risk.
Once the risk tolerance of the individual investor has been decided, the investor needs to find out what IRA options are out there.The first question to ask is "does the investor want to pay the taxes on the account now or defer them until retirement?"This will depend entirely on what the investor believes his or her future situation will be.If the investor believes that he or she will be in a higher tax bracket during the retirement years, he or she should pay taxes on the money now.Otherwise, choosing a tax deferred account makes a lot of sense.
The next step is to find the right place to put the money.Banks typically offer the safest IRAs that can be opened for as little as $100, but with that safety, they typically offer the lowest interest rates available.The money won't grow very fast.It may not even outpace inflation, but it will be there when retirement rolls around for whatever that's worth.
Mutual funds offer greater returns and greater risks.A manager of the fund chooses a selection of stocks in which to invest the money.Those stocks may go up and down, but the fund is generally balanced to counteract any huge losses.Mutual funds may also offer the investor the opportunity to eliminate some investment options.If the investor wants to invest in green companies or doesn't want to invest in alcohol or tobacco, there are funds that will accommodate those wishes.It is important to note that regardless of how the fund does, there is generally a maintenance fee attached to the fund.That is why some people will choose to combine IRAs when the opportunity comes around.
A brokerage account gives the investor free rein with his or her money.This type of IRA should only be used by those with experience in investing.They offer the most potential reward and the most risk.Essentially, the investor becomes his or her own mutual fund manager without the benefit of having hundreds of thousands of other investor dollars to mitigate potential risks.Of course, this can also mean greater rewards and flexibility.
When planning for retirement, IRAs can offer the best of all worlds.They can be tax free or taxed.They can be safe and offer small returns, or they can be riskier and offer greater returns.The investor needs to decide what type of IRA he or she wants and then jump in.The sooner the investor starts, the more he or she is likely to have for retirement.
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