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Learn how easy it is to start investing with an IRA. This episode we go over how you can set up your account and choose the right investments for your situation.
I was on the phone last week catching up with a friend. During the conversation she had mentioned they were looking at pumping up their contributions for retirement. She had heard of IRAs, but she wasn’t too familiar with them and wanted to how to get them set up for her and her husband.
Since there are other couples having some of the same questions, I thought doing an episode on it this week would be helpful. My goal is to give the essentials so the two of you can have overall picture and plan on where to begin.
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Why IRAs Are Awesome For Retirement
Individual Retirement Accounts or IRAs can be a critical piece to help you build the retirement that you want. You contribute to them and that money can investing in a variety of ways.
There are several types IRAs but for this episode we are focusing on two – traditional and Roth. The crucial one you need to be aware of is when you’re taxed.
- Traditional: If meet certain requirements, you receive deduction when you contribute into the account. When you take money out during retirement, though, it will be taxed as income.
- Roth: You don’t get any deductions for your contributions, but provided you meet requirements, the money you withdraw is tax free.
Right now if you’re under 50 your annual contributions to your IRA is $5,500. If you’re 50 and over, you can put in up to $6,500.
That means married couples can put in $11,000 – $13,000 total depending on age.
You can contribute to a traditional or Roth IRA whether or not you participate in your employer’s retirement plan.
So if you can do both, go for it.
These accounts offer you two huge benefits with taxes, give you more control with your investments, and if you’re married your spouse may be able to have an IRA even if they personally didn’t earn income.
While that money is in your account the principle along with any gains you make grow tax free. This is huge because with the power of compounding interest your investments can build much more over time.
IRAs also give you more control over your investments than what you usually get with an employer’s 401(k). With your job, you may limited to a few options and they may not necessarily be the most efficient ones. With IRAs you choose what you want to invest your money in.
Setting Up an IRA
If you want to set up an IRA is a pretty simple process. Basically you:
- Choose a provider that suits you
- Sign up and open an account
- Fund it
You can open your IRA with a brokerage, bank, or credit union.
Wherever you decide to invest your money, please make sure you are aware of any and all fees that you will be paying.
You want to keep them as low as possible because the more money that stays in your account, even small amounts, can grow into something substantial when it comes time for you to spend it during retirement.
I use Vanguard and my husband has his IRA with Betterment. They both make investing simple and low cost.
If you can open a checking account, you can open an IRA. I opened our accounts online. Really, it’s that easy.
After you’ve set-up your initial deposit, you’ll probably be offered the option for automatic contributions to your IRA. Do it.
You can always pause things if you hit a rough financial patch.
I’d rather you automatically contribute a small amount every month then have you transferring at the end of the month, even if you think the contribution will be bigger.
You’re more likely to reach your goal. As your income grows, you can easily adjust your scheduled transfers.
How to Pick the Right Investments For You
You have your account ready so now it’s time for the fun part – getting your investments.
You may be overwhelmed with all the choices out there, but if you’re looking for a general guideline look at investments that are diversified and low cost.
Diversified investments protect you. Company stocks and individual sectors like tech or real estate can fluctuate, sometimes drastically. When your money is spread out over different asset classes you minimize that volatility.
Low costs means bigger returns for you as your money is being used for investments rather than administration fees.
Using index funds or ETFs in your IRA can cover both of those criteria. They match whatever index you are tracking, so you can invest in the U.S. stock market with one index fund.
You get diversification without the headache of tracking a ton of companies or spending a a lot of money. Since they are passive manged they typically have less fees than an actively managed fund.
If you haven’t already, download and listen to episode 19 to hear Mike Piper go over the many reasons and benefits of investing with index funds.
We use them in our IRAs and love them. We just check in to verify our contributions went in and were invested as planned. (Takes about 5 minutes each month.)
Once you decided which investments you want to use, go ahead and get those contributions automated.
And that is it.
You two just have to make sure your portfolio matches your asset allocation and depending where you keep your accounts, that might even be taken care of as well.