You’re ready to start saving for retirement, but you may be feeling overwhelmed by the number of resources available to help you do so. Learn more about one of those options, the individual retirement account (IRA), to see if it might be the right choice for your financial goals.

What Is an IRA – and What Are Its Benefits?

An IRA is a long-term, tax-advantaged savings account and a good option if you are self-employed or if your employer doesn’t offer a 401(k). It differs from a 401(k), another popular option for retirement saving, in that you can open it even if you don’t have an employer – as long as you have taxable income. That means if you are self-employed, if your spouse earns an income, if you exercise nonqualified stock options, if you have been awarded a taxable scholarship or fellowship, or even if you receive nontaxable combat pay, you might be able to open an IRA.

This type of retirement savings plan has three main benefits.

1. Flexibility. With an IRA, you can choose the investments that will help you meet your retirement savings goals –including stocks, bonds, mutual funds, and other investments. You are not limited to a specific set of investments, as you typically would be with an employer-sponsored 401(k), and you don’t have to worry about rolling your plan over if you change jobs.
2. Investment gains. While experiencing losses with invested funds is always a possibility, as well as fees and charges associated with them, the money in your IRA will increase as long as your investments are gaining positive returns.
3. Tax advantages. A reduction in your taxable income for contributed funds or tax-free qualified withdrawals are a couple of the tax advantages you can expect, depending on which IRA you select.

What Are the Most Common Types of IRAs?

Review the details of each type of IRA before you select one, and remember that fees associated with managing IRAs vary by provider. Types of IRAs include SEP IRAs (available to self-employed individuals), SIMPLE IRAs (which can be used by people who are self-employed), nondeductible IRAs, spousal IRAs, and self-directed IRAs, but the following two are the most common:

Traditional

These IRAs typically offer more tax advantages upfront because contributions may be tax deductible. With a traditional IRA:

• You (or your spouse, if you file taxes jointly) can contribute at any age, as long as your income falls below an annual amount set by the IRS.
• You may withdraw money at any time, at any age, but if you are younger than 59 ½, you may have to pay an additional 10% penalty.
• You may be able to deduct contributions, but you’ll need to check with a tax advisor to see if you qualify for this benefit. It will largely depend on your level of income you earn and whether you already have a retirement plan at work.
• You must take at least the minimum distribution amount after you turn 72.

Roth

If you choose a Roth IRA, you may enjoy more tax advantages in retirement, since qualified withdrawals are tax-free. With a Roth IRA:

• As with traditional IRAs, you (or your spouse, if you file jointly) can contribute at any age, as long as your income falls below an annual amount set by the IRS.
• Generally, withdrawals of investment gains aren’t taxable, but if you’re younger than 59 ½, you may have to pay a 10% penalty.
• While your contributions are not deductible from your taxable income, you can make qualified withdrawals tax-free because you paid taxes when you contributed.
• You are never required to take distributions.

How Do I Open an IRA?

Ready to open an IRA? You need to take seven important steps.

1. Determine your retirement goals and your income eligibility. These will guide the types of investments you can choose.
2. Find a trusted IRA provider. This is your responsibility, so do your research and consider what investment options the provider offers and what fees are associated with your account.
3. Fill out the required documentation. This may be online or on paper.
4. Designate a beneficiary or beneficiaries. These are the people or entities who will receive any money left in your IRA if you die. You can typically select multiple beneficiaries and designate percentages.
5. Choose the right mix of investments. These should be based on your specific goals and appetite for risk. A financial advisor can help.
6. Set up contributions. You may want to set them up based on your paycheck, monthly, or annually. Behavioral economics research shows that automatic contributions are an effective way to save regularly and consistently.
7. Monitor your account. Check on your IRA at least once a year. Monitor your fund performance and determine if you are meeting your investing goals.

 What Are My Investment Options?

With an IRA, you determine how your funds will be invested. Some investments are riskier, and understanding your personal level of risk tolerance is key to diversifying your investment choices. Your investment options include, but are not limited to:

• Mutual funds. A mutual fund is a company that pools money from many investors and puts that money into a mix of securities (such as stocks, bonds, and short-term debt) ranging from riskier to safer, depending on what you choose.
• Index funds. Similar to mutual funds, these instead have a portfolio that closely follows a particular market index, such as the S&P 500.
• Target-date funds. These mutual funds automatically adjust their asset mix over time to become more conservative as you get closer to retirement.
• Exchange-traded funds (ETFs). These are also similar to mutual funds but trade on an exchange like individual stocks.
• Real estate investment trusts (REITs). These are companies that own or finance income-producing real estate.
• Stocks. With these investments, you have a share of ownership in a company.
• Buying a bond means you are lending money to the issuer, whether that is a corporation or a government. The issuer then pays you a specified interest rate on top of your principal.
• Variable annuities. These are contracts between you and an insurance company that offer consistent income generated from investments.

Ready to get started? Get the full Retirement Guide here: https://www.minsterbank.com/retirementguide/