What is an IRA?

I previously wrote a post called What is an IRA?, but I have had some inquiries about IRA’s, so I will try to keep it simple and explain Individiual Retirement Accounts a bit further for the beginners.

What is an IRA anyway?

  1. Well, an Individual Retirement Account (IRA) is basically an account that provides huge tax benefits when used to save money for retirement.
  2. It is an ACCOUNT that HOLDS investments IN it. I find that some people get this part confused, so remember IRAs are NOT investments themselves, they are only the ACCOUNT that holds the investments. Within the account you can invest in stocks, mutual funds, CDs, money market funds, and you can even own real estate in your IRA.
  3. IRAs can be opened at brokerage firms (Merrill Lynch, Edward Jones, etc.), online brokers (Zecco, Scottrade, ETrade), mutual fund companies (TRowe Price, Vanguard), and most banking institutions.
  4. You get to choose which investments go in the account. Keeping that in mind, many banks will not give you the freedom to invest in stocks and mutual funds, because they do not offer brokerage services (I know the larger ones do, so if you bank with them, go for it). But YOU are the one who decides what investments go in your account.
  5. You CAN open multiple IRA accounts at different places – keep in mind that there is a maximum amount that you are allowed to put in to your IRA each year ($4000 for 2007). I don’t recommend it; it gets messy. I know from experience. You have to keep track of how much you put in each one each year and make sure the combined amount doesn’t exceed the IRS limit. Another reason for not having multiple IRAs opened up is that…
  6. There is an annual fee of $30-40 charged by the brokerage firm or bank that you have your IRA with. Some are more, and some are less, but this is a good ballpark figure.

Find the right IRA for your situation by taking this quick 5-question quiz.

Roth IRA or Traditional IRA?

Of the two most common and basic IRAs, there are two types; ROTH and Traditional. The main advantage of the Roth IRA is that you use after-tax money to fund it, so when you reach retirement age you will not pay ANY taxes on the withdrawals (related: When can you withdraw from your IRA?).

The Traditional IRA, on the other hand, offers an up-front tax deduction, but commands taxes to be paid in retirement.

It is generally a safe assumption that the ROTH is usually is the better choice for most people. However, there are major differences between the two, so in order to get the best advice for your particular situation talk to a christian financial advisor.

There is a whole lot more to learn about ROTH IRAs and Traditional IRAs, but if you can honestly admit that you do not want to spend the time or energy to figure out which one will work better for your situation, then just pick one and start saving. It is far better to start saving, than do nothing while you try to figure out what to do.

Where can I open a Roth IRA?

So, you have learned the basics about IRA’s and you know that now is as good of a time as ever to start one, but where do you go to open one?

Really, you can open them just about anywhere: banks, brokerage firms, discount brokers, some mutual fund companies etc. Just be aware that WHERE you open it may impact what investments are available to you. For instance, some banks only offer CDs in their IRA’s.

ShareBuilder - Welcome page I have IRA’s opened at ShareBuilder and Zecco (see below) and I have to say that I like ShareBuilder the best. They allow you to buy stocks, mutual funds, and even ETFs for as little as $4. They have no account minimums so you can open an account with $25 if you would like. They also have no inactivity fees – which is great if you aren’t an active investor. I have now been with them for about 5 years and have had no issues at all. They are my top recommendation for an online discount broker.

Questions to ask

No matter where you open your IRA, you should find out the answers to a few questions…

  • Is there a minimum initial investment? How about minimum contributions?
  • What types of fees are charged?
  • Does the company offer automatic contributions?
  • What investment options are available? Stocks? Bonds? Mutual funds? CDs?

If you open the account online, you should be able to find the answers to these and any other questions you may have on the company’s website. If not, feel free to call them. Most of them are so excited to have new customers that they will make the process as painless as possible.

(added 04/21/08) Zecco.com is another option for opening an IRA. They actually offer free stock trades. I haven’t opened an account with themyet, but I am going to be opening one soon. I will write more about it when I do…

Just find some place that you feel comfortable with to open your IRA. As I mentioned the options are endless, but even if you decide you want to move your IRA – you can without much hassle. I will have to go over IRA rollovers later.

Just remember, the hardest part is just taking the first step. It may take you an hour or two to open an account, but it will be well worth it when you look back in 20 years.

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  1. Debt Free Revolution

    Just a bit of a picky note, IRA actually stands for Individual Retirement ARRANGEMENT, not account, and it is even possible to put real estate or a business under an IRA 🙂

  2. bob

    @Debt Free

    “IRA actually stands for Individual Retirement ARRANGEMENT”

    Really? I have never heard that before and I have heard “Account” from some very reputable sources – So, I guess if I am wrong I am in some good company 🙂

  3. pachecosita

    Can you withdraw the IRA money?

  4. Clara

    I will inherit an IRA from my husband….
    I also want to know if I can withdraw money from it.

  5. Freeda Carter

    I was told today by my Credit Union that my annual IRA distribution is always made on Nov 30 of each year (yesterday for 2010). When I asked what about the interest that should be paid in Dec, I was told they do not pay interest during that month. I do not think this is legal and want to know what agency in Washington DC should be notified. I called the NCUA and could not even get past the person who answered the telephone so, I guess they don’t care OR perhaps it IS legal. Who else can I contact about my concerns? Thanks.

    Freeda Carter

  6. DMorrison

    I opened an IRA in 1980 or 81 in Los Angeles California for my son when he was two years old. I moved from LA to Ohio and lost all my paperwork in a flooded basement. I cannot remember where the Account was at. Is there any way to locate this account to see if it is still active?

  7. Rene Gutierrez

    question: my father passed away leaving his ex-girlfriend the beneficiary of his IRA account. she left the country to go back home (thailand)before his passing, and i have no way of getting in touch with her, as his eldest son (and former power of attorney of medical decisions), do i have any rights to his account or maybe a certain time limit she has before i can receive beneficiary privileges, or do I even have any rights to his account? thank you

    • John Frainee

      Rene, I’d consult with a lawyer and see what exactly your rights are.

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