How to select an ira

How to select an ira

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One of the best things about an IRA — compared with, say, a workplace retirement plan like a 401(k) — is the much larger selection of investment options available within the account.

In most IRA accounts , you can pick individual stocks or choose from a long list of mutual funds. Or you can leave those decisions to an expert by choosing a low-cost robo-advisor — a computer-powered investment manager — to do the work for you. (Check out our top picks for robo-advisors .)

That breadth of choice makes the IRA — both Roth and traditional IRAs — an attractive option for your retirement savings, especially once you’ve maxed out 401(k) matching dollars. But in some ways, choice also makes things more difficult for the investor.

Here’s a step-by-step process for how to choose investments for your IRA.

1. Understand asset allocation

Just the words “asset allocation” sound complicated, but they’re not: This is simply how your money is divided among different types of investments. Big picture, that means stocks, bonds and cash; little picture, it gets into specifics like large-cap stocks versus small-cap stocks, corporate bonds versus municipal bonds, and so on.

If you invest $10,000 in an IRA account and $6,000 of it is in stock funds and $4,000 of it is in bond funds, your asset allocation is 60/40. Keep in mind: You’ll get the biggest return over time — and take the greatest amount of risk — with stocks (also known as equities), while bonds and other fixed-income investments help balance out that risk because they’re relatively safe compared with stocks.

2. Consider your tolerance for risk

This is the trick of it all, and it involves considering a couple of things, including your time horizon — how long the money will be invested — and your ability to tolerate risk. You want to take enough risk that your money will grow, but not so much that you’ll bail out or lose all your hair when the market gets rocky.

There are rules of thumb to guide you, the most notable being to subtract your age from 100 (or, to sway more toward risk, 110). The resulting number is the percentage of your portfolio that should be allocated toward stocks: Under this rule, if you’re 30, you’d direct 70% to 80% that way. You may find you want more or less equity exposure than the rule dictates, so it’s fine to use it as a starting point and then edge the numbers around until they suit your needs.

Your age matters because, in general, you want to take more risk when you’re young and then taper down as you inch toward retirement. That doesn’t mean you shouldn’t invest in stocks in retirement — given today’s life spans, you’ll still need that money to last 30 or more years past age 67, and that requires investment growth — but many people choose to dial it back a bit so there’s a greater fixed-income allocation from which to take distributions.

That way, if the market takes a dive, you don’t have to sell at a low; you can simply pull from the safer havens in your portfolio.

How to select an ira

Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here’s how we make money.

The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

IRAs are important tools for saving for retirement, and opening an IRA is easy. Here’s how to open an IRA.

There are four fundamental steps to starting an IRA :

1. Decide how much help you want: What type of investor you are — hands-on or hands-off?

2. Choose where to open your IRA: Your choice should align with your investor type above.

3. Open an account: It takes just a few minutes.

4. Fund the account and get started: If you go with a broker, look for low-cost mutual funds and ETFs. If you choose a robo-advisor, they’ll pick investments for you. (Banks also offer IRAs, but they are more about saving money than about growing your money. For a long-term goal like retirement, investing with a broker or robo-advisor makes the most sense.)

Read on for more details on each of these steps.

How to select an ira

1. Decide how much help you want

What sort of investor are you — hands-on or hands-off? Your answer will help determine whether you should set up an IRA with an online broker or a robo-advisor.

If you want to choose and manage your investments, you’ll need an online broker. Here you’ll open an account and buy and sell investments yourself over time. We’ll give you some tips on how to choose a broker below.

If you’d like an automated way to manage your investments, consider a robo-advisor. A robo-advisor will choose low-cost funds and rebalance your portfolio, keeping it in line with your investing preferences and timeline — for a fraction of the cost of hiring a human financial advisor. Keep reading for more on what to look for in a robo-advisor.

Find an IRA that will come with free financial advice (from an advisor that has your best interests . [+] in mind).

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There’s no getting around it: You should have an IRA. If your company doesn’t offer any sort of retirement savings plan, an IRA might be your primary retirement savings resource. However, even if you have an employer-matched 401(k), an IRA is another vehicle you can use for retirement savings. First, you have to choose between a Roth or a traditional IRA. For a Roth IRA, you don’t get a tax deduction when you put money in, but you get to withdraw your money (after age 59 and a half) tax-free. On the flip side, you can deduct your traditional IRA contribution on your taxes now, but you’ll have to pay taxes when you withdraw your money in retirement.

It’s one thing to recognize that you need an IRA, and an entirely different thing to go about opening up an account, making a contribution, and investing your money. You should first know that you can contribute up to $5,500 a year to your IRA. You can also make your 2017 contribution until April 2018. So if you don’t have money saved for a contribution yet, don’t worry. You still have time.

But first, you’re going to need to open an IRA with a bank or lender you feel comfortable with. Here’s what you need to look for:

1. Pick a company you trust. Your options are going to be banks, mutual fund companies, insurance companies, or brokerage firms. Each option has pros and cons, and long-term implications. Someone looking for guaranteed income might opt for an IRA with an annuity, which you can find with an insurance company. On the other hand, if you’re looking for investment flexibility, you might want to go with a brokerage firm. Brokerage accounts will offer plenty of investments that are sold without commission or sales charges.

2. Consider how you want to invest your money. Do you want to buy ETFs and mutual funds? Do you want to pay someone to come up with an investment plan for you? If you’re after investments that don’t come with fees or commissions, choosing a brokerage account may be your best bet.

3. Think about whether you’d want a CD. Banks that offer IRAs often promote CDs, or certificates of deposits. The advantage of CDs is that they’re very safe. The disadvantage is that the return on investment won’t be as good. Investing in the market may yield a 6% return while a CD may only yield a 1% return. A lot of this choice has to do with risk tolerance and when you’re going to retire. If you’re retiring in 30 years, you can be aggressive. If you’re retiring in five years, it may behoove you to play it safe.

4. Decide if you want annuities. If you’re interested in annuities, you might consider an insurance company-based IRA. Annuities typically aren’t recommended for IRAs. Why? Because a big advantage of annuities is that your money is tax-deferred—and with your IRA that may already be the case. However, an annuity provides guaranteed income, so sometimes those close to retirement will choose that route.

5. Consider a lender that will offer a free meeting with financial advisors. As a perk, some lenders encourage their clients to meet with their expert advisors at no additional cost. You need to be careful, though. Some of those advisors are pushing specific stocks or products, while others are genuinely giving you personal, helpful financial advice. Needless to say, you want the latter.

6. Be aware of fund and management fees. Opening an account isn’t always free. But some places are charging more than others, and there’s a host of things you can be charged for. In addition to transfer fees there are trading fees, advisor fees, and fund management fees (depending on what you want to invest in). The good news is most of these fees are avoidable, as long as your account and investments are well-researched and you pay attention to the fine print. Don’t hesitate to ask questions at every step when you’re opening your account.

How to select an ira

In this article:

  • Is a Traditional or Roth IRA Best?
  • How to Find an IRA Provider That Suits Your Style
  • Open Your Account

If you’re ready to begin funding your retirement, you may not know exactly where to start. Often the best option is an employer-sponsored program such as a 401(k) plan or, if you work for a nonprofit organization or government agency, a 403(b) plan. These plans are a great way to save for retirement because employers typically match some or all of your contributions, accelerating the rate at which you can accumulate savings.

If you don’t have an employer-sponsored savings plan, or if you’re fortunate enough to have maxed out your annual 401(k) or 403(b) savings limit, you may want to set up an individual retirement account (IRA) on your own to further your retirement savings goals.

Like a 401(k) or 403(b), an IRA is an account you can use to set aside savings for use in retirement, typically with some tax advantages. Money you place in an IRA can be invested in any number of ways, via options that vary by account type and provider.

You can set up IRAs through many banks, credit unions and investment brokerages, and the range of offerings can be bewildering. Here’s an overview of what to consider when comparing IRA providers, and settling on one that’ll meet your needs and investment style.

Is a Traditional or Roth IRA Best?

The first step in choosing an IRA provider is to decide whether you prefer a traditional IRA, in which your savings are invested on a pretax basis, or a Roth IRA, in which your contributions are made after you’ve paid taxes on them. As of 2020, both types of accounts allow a maximum annual contribution of $6,000, or $7,000 if you’re 50 or older. They differ in the following ways:

  • With a traditional IRA, money you set aside in the fund (along with any investment returns that accumulate) is exempt from federal income tax until you withdraw it. You’ll pay a 10% tax penalty on any funds you withdraw before you reach the age of 59½, and you must start withdrawing from the fund, and paying taxes on the proceeds, by age 72.
  • With a Roth IRA, contributions are made using post-tax dollars, meaning you cannot take the contributions as deductions on your federal income tax return. But your contributions to the fund and any accumulated investment growth are not considered income (or subject to income tax) when you withdraw them. As with a traditional IRA, there are penalties for withdrawal before age 59½; but in contrast to a traditional IRA, withdrawals from a Roth IRA are never mandatory. There’s no age at which you must start withdrawing Roth IRA funds, and you can even leave the full contents of a Roth IRA to your heirs.

Choosing between a traditional IRA and a Roth IRA often comes down to a tax preference. Certain people, particularly high earners, choose a traditional IRA because they assume that their income will be lower in retirement, and they prefer to use their pre-tax IRA contributions to reduce their taxable income now. Others, especially those just starting out, may prefer a Roth because they expect to pay higher taxes later in life. They may also prefer the flexibility of being able to withdraw or not withdraw the funds anytime after age 59½ (as long as they’ve had the fund for at least five years) or the ability to use Roth savings for educational and certain other expenses without penalty.

How to Find an IRA Provider That Suits Your Style

If you’re not clear on whether a traditional or Roth IRA is better for you, you can make that part of the conversation when you start auditioning potential IRA providers. Many providers offer both types of funds, and company representatives should be able to help you clarify your preference.

Other considerations you should bear in mind when talking with the provider include the following:

  • Approach to risk: The first thing any good investment planner explores with a new client is tolerance for risk. No investments are guaranteed, and it’s always possible to lose money if securities or industries you’ve invested in take a financial hit. But some investment vehicles pose greater risk (and potential for higher returns) than others. If you’re comfortable with making bolder investments in pursuit of bigger gains, certain IRAs with more aggressive investment funds—and fund managers—will better suit your approach. Other offerings (and investment advisors) will be more appropriate for risk-averse investors. Ask about each provider’s portfolio offerings and how they align with your approach to investment risk.
  • Desire for investment guidance: If you consider yourself a savvy investor and are comfortable managing your investments yourself, you can opt for a fund with a do-it-yourself approach that lets you allocate your savings among mutual funds, stocks, bonds and other investment instruments yourself. If you’d prefer to have a professional portfolio manager handle your investments for you, you can find IRA providers that offer that service as well. There are also funds managed by algorithms that fall somewhere in the middle, with a goal of expanding your holdings through fairly aggressive (and relatively risky) investment vehicles early in your career, and shifting to safer, more conservative vehicles as you approach retirement age, to protect the wealth you’ve accumulated.
  • Customer service options: Even the most sophisticated investor will occasionally have a question or require some assistance from their IRA provider, and those with less experience may have need for regular consultations with the experts. It’s important to understand and feel comfortable with the ways your IRA provider delivers help. Some offer access to a contact person you’ll work with consistently every time you need a hand; others provide live phone assistance, but use a pool of representatives who can call up your account and answer relevant questions; and still others use live text chat or email to answer your questions.
  • Fees: All IRA providers charge fees, but the way they are structured, and how they relate to their fund management and customer service offerings, can vary considerably. Some charge flat annual fees, some charge for each transaction or trade, and others offer a limited number of free customer service calls per year and charge for any additional contact. Make sure you investigate the fees that apply at each IRA provider you’re considering, and look for a good fit for the way you expect to use the provider’s services.

Open Your Account

Once you’ve settled on an IRA provider and service offering, you can set up an account yourself within a few minutes. Many accounts can be opened with a zero balance, but some require minimum initial contributions of a few hundred dollars. In addition, certain IRA mutual funds have minimum buy-in requirements as high as $1,000. In that case, you could open your IRA account with a smaller contribution, but wouldn’t be able to invest in the fund(s) until you accumulate enough to meet their minimum buy-in requirements.

An IRA is a great vehicle for accumulating and growing retirement savings, and identifying the right IRA provider can be the first step on a prudent financial path. Do plenty of research, ask lots of questions, and when you find a provider that addresses your concerns and reflects your investment priorities and style, and you’ll be on your way to solid retirement savings.

You’ve probably heard a lot about IRAs, and how they’re an investment option for retirement. But what exactly is an IRA—and is it the right choice for you?

IRA basics

An Individual Retirement Account (IRA) is a type of investment vehicle that helps you save for retirement while providing tax-advantaged status for your retirement savings.

There are two types of IRAs: Traditional and Roth

In a Traditional IRA, you deduct your IRA contributions from your taxes in the year you made the contributions, which lowers your taxable income for that year. You then pay taxes on the money when you withdraw it in retirement (based on your income at the time of withdrawal).

In a Roth IRA, you contribute using after-tax money (taxed based on your income at the time of contribution). You can withdraw your contributions without taxes or penalties at any time. If you have earnings, you can withdraw them tax-free in retirement. 1

You can set up an IRA in one of two ways:

  • A rollover IRA. Transfer over existing retirement savings (like a 401(k) account from a past job) to fund your IRA.
  • A start-up IRA. Make an initial, lump-sum deposit to fund your IRA.

Why choose an IRA for your retirement savings?

An IRA is all about you. It offers:

  • Convenience. Your IRA belongs to you. It’s not tied to a company you work for, and it sticks with you through retirement, so you have more flexibility with when and how you contribute to it.
  • Control. You’ll have access to a broad range of investment options, not just what’s offered in an employer retirement plan. (Options can include mutual funds, stocks, bonds, and more—and we can help you with investment choices if you want.)
  • Consolidation. You can transfer other retirement accounts into your IRA—consolidating your savings in one spot.

Why choose Principal for your IRA?

You’ve seen why an IRA can be a great option for saving for retirement. Learn more about our IRA options.

Or, open your IRA with Principal today:

We offer options specific to your investing style.

  • A Principal IRA keeps you in the driver’s seat. It gives you the control—with as much or as little assistance as you want to help you make informed investment decisions.
  • A Principal ® SimpleInvest IRA uses technology to create an investment mix personalized to you, that’s monitored and rebalanced on an ongoing basis.
  • Let us connect you with a financial professional in your area to discuss a rollover IRA.

Want more info first? Check out our article on things to think about when opening an IRA.

  • Rollover to an IRA
  • Call800-247-8000, ext. 2251, to talk through your options.

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Help to reach your retirement goals

3 reasons to start investing young

Check out three reasons for investing aggressively in your 20s and 30s.

Avoid outliving your savings in retirement

Find out how much you may need, how to help close a savings gap, and how handling your money can change after you retire.

1 Your account must be open for 5 years and you must be over age 59 ½ to be eligible for qualified tax-free withdrawals of earnings.

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The subject matter in this communication is educational only and provided with the understanding that Principal ® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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You can open an IRA through almost any large financial institution, including banks, mutual fund companies and brokerage firms. Most IRA providers offer a broad variety of investment options, ranging from CDs to money market funds to mutual funds to individual stocks and bonds, so you can put together a diversified retirement portfolio within your IRA no matter which one you choose.

The major difference between most institutions is the fee structure. So make sure to carefully compare fees before choosing where to open your IRA. A no-load mutual fund family such as Fidelity, T. Rowe Price or Vanguard can often be a good way to go.

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How to select an ira

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Thomas Brock, CFA, CPA is a well-rounded financial professional, with over 20 years of experience in investments, corporate finance, and accounting.

Many people think a will can state how their individual retirement account (IRA) is paid out. However, IRA accounts and other types of accounts like 401(k)s, 403(b)s, and 457s, have a beneficiary designation attached to them.

Find out more about choosing who will receive your IRA and how these plans can pass on or be used by your heirs.

Key Takeaways

  • Your will cannot state how your IRA will be paid out because the IRA overrides your will for the account.
  • Retirement accounts have forms for designating heirs, which you fill out when you open the account.
  • You can name a trust as the heir of your IRA, but it must have special wording for it to be effective.
  • You can name minor children as your IRA heirs, but you’ll need to appoint someone to manage the account until they reach the legal age.

Completing Beneficiary Designation Forms

When you open these accounts, you fill out a form. These forms are used to dictate how the money in the account is dealt with upon your death. The names you put on your form override what you have in your will or trust (if you have one).

One of the biggest mistakes made on IRA accounts is not naming someone as the heir. If you do not fill out the form or there are errors, the funds are given out based on the custodial agreement defaults.

Naming a Spouse

Your spouse is the only person that can inherit your IRA and treat it like it is theirs. Spouses have a number of options when they inherit an IRA. They can roll it over into the IRA they have or leave it as an inherited IRA. If they keep it as an inherited IRA, they can withdraw from it as needed.

Once your spouse owns your IRA, they can name whomever they would like as their heirs. There is one worry many people have about their IRA when they die; the spouse they named might remarry and change the heirs in their IRA. If you had children with this spouse and named them as secondary beneficiaries, that spouse could change the beneficiaries upon the new marriage. This would leave your children out of the IRA altogether.

If you are married, trust that your spouse will follow your wishes and have stable adult children, the best solution might be to name your spouse as your primary beneficiary and your children as contingents.

Some lawyers will draft a special conduit IRA trust to manage and distribute IRA assets. This may work better than naming a standard revocable living trust.

Naming a Trust

Frequently, some form of trust is named as the beneficiary of an IRA. This is done to protect the assets. The surviving spouse can use it as needed, but they won’t be able to change your other beneficiaries. The goal here is to make sure the assets are given to the people you want them to go to; and that no one can change them.

If you name a trust as a beneficiary of your IRA, the trust must be drafted in a special way for it to be valid. If not done right, the IRA might be paid out on an accelerated schedule rather than letting each heir have the option to draw it out over their lifetime.

There is one downside to naming a trust—they need to be managed by someone who knows how. Many IRA accounts are not that large, and the trustee will likely want to be paid.

A trustee that oversees the management and distribution of your IRA and other assets can be costly. If they are paid from your small IRA, the account might empty too quickly for your heirs to benefit from it fully.

Trusts work better for someone with large IRAs and assets the owner wants to be handled in a certain manner.

It may not be worth it to require that small accounts remain in the trust. Before you name a trust as the beneficiary, you should discuss it with a lawyer familiar with trust laws. This will help you see if there is an option that can protect your funds for the people you want them to go to.

Naming Minors as Heirs

If you name minor children or grandchildren as direct heirs of your IRA, then your will must name someone to manage the funds on their behalf until they reach the age 18 or 21. This age in which they can receive it varies by state.

If you have a special needs child or adult child whom you don’t think should receive the funds outright, you may wish to set up a special needs trust on their behalf.

How to select an ira

Table Of Content

  • Traditional IRAs vs. Roth IRAs
  • Self-Directed IRAs
  • Types of Custodians for Standard IRAs
  • Tips for Choosing IRA custodian

An IRA custodian is a financial institution that holds your account’s investments and ensures that all government and the IRS regulations are adhered to all times.

It’s not difficult to find IRA custodians, but the best custodian for you will depend on what type of IRA you want and what sorts of investments you want to make with it.

Traditional IRAs vs. Roth IRAs

The main types of IRAs that most individual investors set up are the traditional IRA and the Roth IRA. However, there is one basic difference between the two. A traditional IRA is a tax-deferred account. This means your contributions are tax-deferred until you start withdrawing your funds at retirement. With a Roth, your contributions are taxed. This means the money you withdraw from your account at retirement is tax-free. Additionally, both traditional IRA and Roth IRA allow your money to grow free of income tax.

Self-Directed IRAs

With traditional or Roth IRA, you can have your account self-directed or managed through a custodian. In a self-directed IRA, you have the freedom to choose the funding methods and a wide variety of investment instruments. The custodian allows you to make investments outside the traditional world of investments including bonds, stocks, exchange-traded funds, and mutual funds.

Types of Custodians for Standard IRAs

  1. Banks:
    If you want to invest in money market funds or FDIC-insured security of CDs, the bank can be a good option. However, banks generally do not offer many investment choices outside the traditional ones. Some banks offer broker-types services, but they charge a high fee, probably higher than the brokerage.
  2. Brokerage Firms:
    If you want to invest in individual bonds, stocks, mutual funds, or ETFs, you can opt for brokerage firms to be your IRA entity.
  3. Mutual Fund Companies:
    Mutual fund firms also offer their ETFs and mutual funds for you to invest in.
  4. Insurance Companies:
    Insurance companies offer their flexible premium annuities as basic IRAs. These annuities offer automatic account management, account value protection, and death benefit options. They are either variable or fixed. That said, IRAs are already tax-advantaged accounts. Insurance companies offering tax advantages of annuities is redundant. Additionally, you may have to pay high fees for having these annuities.
  5. Robo-Advisors:
    Robo-advisors are relatively new online investment platforms that offer algorithm-based portfolio management advice. These platforms are automated. This means there is no human intervention. Hence, the fees and other expenses are low.
  6. Custodians for the Self-Directed:
    If you want to choose a self-directed IRA, it can be a little complex. For a self-directed IRA, there are three types of providers: custodians, administrators, and facilitators. However, only the custodians have direct approval from the IRS and are authorized to hold assets.

The other two, administrators and facilitators, are actually intermediaries between you and your custodian (the one that holds your assets). Therefore, if you want to go ahead with a self-directed IRA, it’s better to stick to a true custodian.

All the institutions mentioned above can theoretically serve as custodians for your self-directed IRAs. But if you are leaning towards making non-traditional investments that are open to your self-directed IRA, you need to be particularly careful about your choice of custodian. If you are not careful, you can easily violate the IRS rules and pay severe penalties.

Tips for Choosing IRA custodian

  1. A Wide Range of Investment Options
    The bigger the assortment of alternate investments, the more options you have to diversify your funds. So if you want to invest beyond stocks, bonds, ETFs and mutual funds, then your chosen IRA custodian should be able to help you look for non-traditional options like real estate and privately held companies.
  2. Low Maintenance Fees
    Fees come in various forms – annual maintenance fees, commissions for making trade, loads for mutual funds and the like. So, if your chosen IRA custodian charges a certain type of fee, check if it is uniform across custodians because these fees are not a “given”. And if you are investing in mutual funds, make sure your custodian offers different types of no-load mutual funds.
  3. Knowledgeable About the Rules
    If you have multiple IRA accounts then according to experts, you should consolidate your accounts into one fund and delegate a single IRA custodian. Your IRA custodian should be knowledgeable about the rules of the IRS, the rules based in tax law, and also know which types of IRA accounts cannot be consolidated.
  4. No Restrictions on Investments
    Certain IRA custodians limit your investment options because the nature of their charter is restricted. These limitations may not be the same as the restrictions imposed by the IRS. So, make sure you choose an IRA custodian with no restrictions. When you are opening an IRA account, make sure your choice is based on the type of account you prefer – Traditional or Roth. If you want to diversify your portfolio then a self-directed IRA will give you the freedom to take check book control of your finances.
  5. Prompt Services
    Unless you are fine working with a robot advisor, easy access to a knowledgeable and experienced financial advisor is very important. When you are managing a self-directed IRA, a vague or incomplete answer is the last thing you’d want to deal with.

Call Self Directed Retirement Plans LLC at (866) 639-0066 today to learn more about the alternate investment choices you can make with a self-directed IRA.

How to select an ira

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.