You wouldn’t turn down an opportunity to move from coach to first class, would you? Both seats do the basic job, of course, but you’d probably choose to enjoy a little more comfort while you’re there. After all, an upgrade’s an upgrade. And an individual retirement account (IRA) just might do the same for your retirement savings.
If you have a fully funded retirement plan at work, like a 401(k), you’re on the right track. But an IRA can help you build a little more wiggle room into your future by giving you additional tax advantages for retirement savings. You can open an IRA at a bank or a brokerage—all you need is taxable income and an idea of your retirement goals.
Quick refresher: What is an IRA?
An IRA is an account that provides tax incentives for retirement savings. Depending on the IRA you open, your contributions and earnings may be tax-deferred, or your earnings may be tax-free. IRAs can offer significant tax advantages designed to motivate you to save so you can stretch those retirement dollars.
Related: What Is an IRA and How Does It Work?
Step-by-Step: How and Where to Open an IRA
Once you’ve determined an IRA is the right move for you, here’s how to open an IRA in three simple steps.
1. Determine your risk tolerance and choose where to open an IRA.
Knowing your risk tolerance will help you to determine where to open IRA. What are your goals for your new IRA account? Do you want no-risk security for the additional boost to your golden years income? Or do you want to pursue the highest returns with an aggressive investment strategy? Typically, you can open an IRA at a bank or a brokerage.
- If no-risk security sounds good to you, you’ll want to take a look at the IRAs offered by FDIC-insured banks, like we do at Ally Bank. For example, you can open an IRA Certificate of Deposit (CD) or even an online savings account for your IRA. At Ally Bank, we offer deposit IRA products along with the safety and security of FDIC insurance, up to the up to the maximum allowed by law. Go to Ally Bank IRA.
- If it’s higher returns you’re after, you’ll need to find a brokerage, like us at Ally Invest, that offers investment services suited to your earnings goals. Within our Ally Invest platform, you can open a self-directed IRA and manage your own investments or let a team of investing professionals handle your Ally Invest Robo Portfolio for you. Just remember, investing involves risk, including loss of principal. Ally Invest products are not FDIC-insured, not bank guaranteed, and may lose value. Go to Ally Invest.
2. Choose the type of IRA that makes sense for you.
All IRAs have tax advantages, but they’re not all the same. Different types of IRAs have different eligibility requirements and tax benefits. Most people end up choosing between a Roth and a traditional IRA, but there are a few other types of IRAs for specific circumstances.
- Traditional IRAs allow you to make pre-tax contributions (subject to income levels). Your money is taxed when you take it out (take distributions) during retirement.
- Roth IRAs allow you to make after-tax contributions, so your distributions during retirement are tax-free.
- SEP (Simplified Employee Pension) IRAs are established by your employer or by you, if you’re self-employed. Contribution limits are higher than those for traditional IRAs.
- SIMPLE (Savings Incentive Match Plan for Employees) IRAs allow employers to set up IRA retirement plans for their workers and make matching contributions.
Depending on which type of IRA you choose, your contributions and earnings may be tax-deferred, or your earnings may be tax-free. It’s a good idea to work with a tax professional or financial advisor familiar with your situation to help you figure out which is best for you.
Keep in mind that you can open more than one IRA in more than one place, as long as your total contributions don’t exceed the maximum annual contribution amount allowed.
3. Fund your IRA account.
Once you’re all set up, you’ll need choose how much and how frequently you want to contribute to your IRA.
- For 2018, you can contribute up to $5500 each year to Roth and traditional IRAs ($6500 if you’re age 50 or older).
- For 2019, the contribution limits increase to $6000 each year and $7000 if you’re age 50 or older. Just FYI, the general rule of thumb is to have one times your income saved by age 30 and by age 35, twice your income.
- SEP IRA contribution limits are a little more complex, so if that’s the plan you choose, find out more about SEP IRAs here.
No matter which type of IRA you choose, experts agree that a consistent approach to funding that plan is key to making sure you get the maximum benefit for your retirement savings. Be sure to visit the IRS website for up-to-date information on eligibility requirements and contribution limits.
Unlike that serendipitous airline upgrade, your future comfort is squarely in your own hands. Give yourself some financial room to move in retirement and consider the advantages of saving with an IRA.