How To Choose The Right IRA Account for Retirement

Published on: April 3, 2024
Last Updated: April 3, 2024

How To Choose The Right IRA Account for Retirement

Published on: April 3, 2024
Last Updated: April 3, 2024

As of 2023, people in the United States will live an average of 20 more years after retiring. The number of people aged 65 and older has also increased since the 1950s and is projected to continue growing.

These figures emphasize the importance of establishing cohesive and future-resilient retirement plans

One way to kickstart your retirement planning is by setting up an individual retirement account or IRA.

IRAs are long-term savings and investment accounts with tax advantages. However, there are different types of IRAs with distinct requirements and limitations. Choosing one can be intimidating for first-timers.

This guide will outline tips to help you pick the right IRA for your needs. First, let’s discuss why you should open an IRA.

Why Should You Open An IRA?

Opening an IRA is essential for the following reasons:

To Grow Your Wealth And Retirement Savings

Some financial experts suggest saving about 80 percent of your salary or pre-retirement income to cover your retirement living costs.

To Grow Your Wealth And Retirement Savings

You have a good start if you’ve been participating in your company-sponsored plan. However, opening an IRA is ideal if you don’t have a plan like 401(k).

You can also set one up to save more funds outside your employer-sponsored retirement benefit.

With an IRA, you can deposit extra funds and gain tax benefits to help grow your savings and reach your financial goals.

This saving strategy can enhance your capacity to meet or exceed the recommended 80 percent savings.

To Leverage Tax Advantages

IRA offers tax advantages. You can either take a deduction for your contributions or get your withdrawals 100 percent tax-free, regardless of how much your investments grow. These benefits will depend on the type of IRA you choose.

You don’t necessarily have to contribute before the end of the year. You can contribute until the tax deadline to get the benefits. For instance, if you’ve contributed in 2023, you can contribute until April 15, 2024.

To Diversify Your Investments

An IRA can give you access to a broad range of investment options. These investments may include stocks, bonds, annuities, or mutual funds.

This selection enables you to create a portfolio suitable to your current lifestyle and retirement plans.

If you don’t have sufficient expertise to manage your investment strategies, you can leverage the advice features of your financial service provider or consult an advisor.

Remember that fees, advice programs, and investment options vary based on the IRA providers. Picking one that offers the best opportunities is crucial to reaching your retirement aspirations.

Bonus: Most People Can Open And Contribute To An IRA

IRAs are accessible to most individuals for the following reasons:

  • You can set up an IRA in just a few minutes through many banks, private lenders, or brokerage firms.
  • Most providers make account management easy.
  • You (or your spouse) only need to earn taxable income for traditional IRAs.
  • Roth IRAs don’t have age limits. However, the contributions may decrease depending on your modified adjusted gross income (MAGI) and tax filing status.

With an IRA, you can also offset the potential losses of 401(k) plans because the account is exclusively yours. 

For example, since you’re only a 401(k) participant, your employer may change plans or limit your investment choices without prior notice. Also, leaving or losing your job means losing your ability to contribute further.

However, an IRA remains unchanged if you switch or lose your job. You can even rollover your 401(k) funds to your IRA.

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How To Pick The Best IRA for Your Retirement Plans

Now that you know the importance of opening an IRA, here are the pointers you must remember when choosing an IRA:

Decide On The Type Of IRA Suitable For Your Needs

The types of IRA include the following:

Traditional

Traditional IRAs are the most popular for individuals who want to build retirement savings with pre-tax dollars.

  • Eligibility: Anyone with earned income.
  • Annual contributions/limits: The $6,500 limit for tax year 2023 increases to $7,000 for tax year 2024. You can add $1,000 if you’re 50 or older.
  • Tax details: Once you reach the age of 59½, you can withdraw the funds without penalties or restrictions. By age 73, you must start taking annual minimum amounts, known as required minimum distributions (RMD).

Traditional IRA is best if you don’t have an employer-sponsored retirement plan or are in a higher tax bracket than you expect to be in after retirement.

Roth

Roth IRAs are best for investing after-tax dollars. While contributions aren’t deductible, you can withdraw the funds tax-free.

  • Eligibility: Based on your income level
  • Annual contributions/limits: The $6,500 limit for tax year 2023 increases to $7,000 for tax year 2024. You can add $1,000 if you’re 50 or older.
  • Tax details: You may incur taxes and penalties if you withdraw earnings before reaching 59½ or if the account is less than five years old.

Rollover

Rollover IRAs are designed to transfer funds from previous workplace retirement plans into traditional IRAs.

  • Eligibility: Anyone with an employer-sponsored plan like 401(k), 403(b), and 457.
  • Annual contributions/limits: You can transfer some of your funds from your previous retirement plan. However, exceptions include loans or RMDs.
  • Tax details: Subject to similar tax, withdrawal, and penalty rules for traditional IRAs.

Self-directed

Self-directed IRAs, also called self-managed IRAs, let you choose your investments. They are available as traditional or Roth IRAs.

  • Eligibility: Similar to traditional and Roth IRAs.
  • Annual contributions/limits: Subject to traditional and Roth IRA requirements. However, you should invest through a third-party trustee or custodian.
  • Tax details: Similar rules to traditional and Roth IRAs.

Inherited

Inherited IRAs are funded from deceased people’s retirement plans.

  • Eligibility: Anyone who is a workplace retirement plan or IRA beneficiary.
  • Annual contributions/limits: No additional contributions are permitted.
  • Tax details: You can withdraw the funds without penalties at any time. However, withdrawals are subject to the inherited IRA distribution rules. The earnings are also taxed based on the type of the original account.

Other IRAs include SEP and SIMPLE, which are designed for small businesses, employers, and self-employed individuals.

IRA Provider

Choose A Trustworthy IRA Provider

You can create an IRA with a brokerage firm, robo-advisor, bank, or credit union.

  • Brokerage firms are best if you prefer high levels of flexibility in investing.
  • Robo-advisors are digital investing channels offering portfolio-building advice based on your age, assets, and objectives.
  • Banks and credit unions may offer IRA money market accounts or certificates of deposit. They may partner with brokerages and investment firms to offer investments beyond their accounts.

To ensure a trustworthy provider, note the following:

  • Review the provider’s track record over the past year and in the last five or ten years.
  • Check the reviews and testimonials of current and previous clients.

For a detailed guide on opening an account, finance companies like SoFi provide a user-friendly application process.

Learn more about how to open an IRA, explore the benefits, and kickstart your journey toward a secure retirement with their platform.

Consider Your Investment Objectives

If you’re considering a specific investment, it’s best to include it in the equation when shopping around IRA providers.

  • If you want to access various types of investment, a brokerage firm is ideal.
  • For a stable account to keep your earnings, you can opt for a bank or credit union to minimize risks.
  • Opening your IRA with a financial institution offering self-directed IRAs is ideal for non-traditional investments like real estate and cryptocurrencies.

Estimate The Fees For Each Option And Consult A financial Advisor

Fees and commissions differ for each provider. These costs also depend on the service you’ll receive.

Thus, comparing the transfer, account, fund management fees, and other expenses will help you expect the costs associated with your IRA. This way, you can prepare and prevent straining your discretionary funds.

Working with a financial advisor for customized guidance based on your resources and retirement objectives is essential.

They can help you create a budget and choose the best IRA provider suitable to your lifestyle, income, and occupation.

Secure Your Future With An IRA

Opening an IRA is a proactive strategy contributing to your retirement’s financial security.

By thoroughly assessing your options, you can choose one tailored to your needs and offers peace of mind in the present.

This careful selection lets you maximize your savings and investments, helping ensure a comfortable and financially resilient retirement.

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Written by Allison Langstone

Allison produces content for a business SAAS but also contributes to EarthWeb frequently, using her knowledge of both business and technology to bring a unique angle to the site.