I have been looking at several possibilities for retirement savings and opening an Individual Retirement Account has a number of advantages. They are easy to open and provide excellent tax savings.
Opening an IRA is a great way to invest for retirement and depending on the type of IRA you choose, you won't pay taxes on any money earned from investments until you withdraw the money from the IRA. Starting an IRA is as simple as following these steps:
- Select a Broker or Institution. There are numerous brokers and institutions to choose from. You should research your choice carefully and avoid high fees. Many IRA trustees will charge around $30 per year to maintain your IRA, but some do not charge a fee at all. You should look into online brokerages, they allow more control and offer inexpensive trading capabilities.
- Open Your Account. Some accounts will require a minimum deposit; others do not require a minimum to get started. If you are rolling over old 401k accounts to start your new IRA account, be sure to deposit the proceeds into the new IRA account within 60 days. Any longer and the money will be subject to taxes and penalties. 529 plans are a form of Educational IRA. Both categories of Educational IRAs, 529 college savings plans and pre-paid tuition are sponsored by states, state agencies or educational institutions. Pre-paid tuition plans lock in future tuition rates while college savings plans are based on market returns. Most 529 plans can be used to attend college in any state no matter which state plan you choose.
- 3. Select Your Investments. Once the account is open and funded it is time to make stock and mutual fund selections for your investments. The acronym, DABL, will help you remember a strategy for your investments. D stands for Diversification, A for Allocation, B for Buy and Hold and L stands for Long Term perspective. You should consider holding a portion of your portfolio in bonds in your IRA. Bonds produce higher rates of taxable income, while stocks typically generate much less income and that dividend income is taxed at a much lower rate—generally 15%. Since IRAs are tax protected this will reduce your tax burden while providing a well-diversified portfolio.
After you've set up your IRA investments with the maximum contributions and safe investments, you might consider alternative investments, such as real estate. Be aware that not every broker will be able to help invest in these alternatives and not all alternative investments are easy to sell.