HOW AND WHEN TO OPEN AN INDIVIDUAL RETIREMENT ACCOUNT

Last week’s blog talked about setting financial goals. If you are one of the millions of people who transitioned to the gig economy last year, one of those goals might be finding a retirement vehicle to replace your 401(K).

One of the most flexible ways is to start an Individual Retirement Account or IRA.

 When is the best time to start an IRA?

 The short answer is now! After all, what are your alternatives?

You can spend the money and not have it when you need it. Then you risk never retiring.

You can also tuck it away in a bank account while inflation erodes its value.

Or you can open an IRA, watch it grow, and take advantage of all the tax breaks it offers.

So, if you meet the minimum qualifying age in your state for opening an IRA, consider doing so. Even if you can only put away $25 a month, that money will compound and grow.

 How to invest in an IRA

Your first step is to decide if you want to be active in your investments or more hands-off.

If you choose active, then select an online broker with low fees. A quick Google search will reveal plenty of options. Then, you can control what you put in your IRA, including individual stocks, mutual funds, and exchange traded funds.

Newer investors or those who don’t relish the idea of making regular investing decisions should consider a robo-advisor.

This is similar to the online broker. But instead of choosing your own stocks and funds, the robo-advisor automatically chooses low cost funds and rebalances your portfolio based on the long-term goals you give it.

Once you have decided your approach to investing, you can select a traditional or Roth IRA.

With a traditional IRA, you save on taxes now but pay taxes on withdrawals made in retirement. You pay taxes now with a Roth IRA but don’t pay any on withdrawals.

Selecting the best type of IRA for your situation is a pretty big decision, so it’s worth studying more in-depth. Here’s a handy guide to get you started.

The next step is to pick an online brokerage and fund your account. As mentioned earlier, there are plenty to choose from, and a Google search will get you started.

But bear in mind, you want fees to be very low on any brokerage account you get.

That’s relatively easy to do these days, as online brokers compete hard for new members. Still, take your time to study several options to get the best deal possible.

There are income limits for funding an IRA. Single tax filers making less than $129,000 annually can contribute the maximum per year. Married filing jointly must make less than $204,000 per year to contribute the maximum amount to an IRA.

Also, please be aware you can’t contribute more than $6,000 annually to your IRA. That number bumps up to $7,000 after age 50.

And remember, you can reach out to a good independent financial advisor or accountant to get more of your questions answered about the best way to start an IRA.

However you approach it, get started as soon as possible, and start securing your future.