How to Open an IRA Account
An IRA is an Individual Retirement Account. It serves the purpose of providing significant tax advantage on savings for retirement. These simple investment accounts allow the individual to contribute a certain amount of money each year and the earnings of which grow tax-free so long as the rules of the account are followed. In an IRA, people invest in mutual funds, stocks, bonds and exchange traded funds, while others choose bank products like certificate deposits and money market savings. Each IRA has certain eligibility requirements and each has unique benefits. Finding the right IRA depends on investors’ eligibility and which benefits suits them the most.
There is no minimum or required IRA contribution, and all earnings on the amounts in an IRA are untaxed until withdrawn. Money may be withdrawn from an IRA at any time, but on withdrawal it may be taxed and/or penalized. Withdrawals from a traditional IRA will always be taxed, either in whole or in part, at ordinary income tax rates.
So should you open an IRA account? For many people it could take up to 85% of your pre-tax annual income just to maintain a similar lifestyle in retirement. That is a tall order, which makes it all the more important for people to start saving for retirement sooner rather than later.
IRA accounts come in 2 types. Traditional one is where investors money invested each year reduces their taxable income and Roth IRA is where no up-front reduction takes place in taxable income and upon reaching retirement, withdrawal of money from IRA will be without any taxes.
To get started with an IRA account, step 1 is to find designated financial institution where you will open an IRA who will hold the money for you and execute any trades or investment that you perform. This can be a bank, mutual fund, brokerage firm, or other investment company qualified to offer IRAs; preferably a discount broker as they offer the lowest transaction costs. When opening an IRA account it is important to consider all the different fees involved, i.e. how much is the Trustee charging, how much commission is the broker charging each time the investor buys or sells a stock, etc.
Step 2 is to open an IRA account and fund it. Most brokers have an online application form where you can open an IRA online. A few brokers now allow investors to complete the entire application online and electronically transfer funds from their checking or savings account to the broker’s respective account. And, by completing a transfer request, investors may also move all or part of an existing IRA to fund a new IRA at the discount broker or mutual fund of their choice.
Many people desire to transfer stock shares they already own into their new IRA. By law shares may be transferred to an IRA only when the transfer is from an existing IRA or from an employer’s qualified retirement plan. Shares may not be transferred from an ordinary brokerage account into an IRA.
Step 3 is to fund the new IRA account. There are limits as to how much money investors are allowed to put into the account. These limits are in place largely because of the tax-free nature of the earnings, and the deductions associated with contributions.