There are many options available when it comes to opening an IRA (Individual Retirement Account). It is important to consider several things when you decide to open your IRA. For example if you are opening it when you are nearing retirement, then you would not want to put it into mutual funds, but since your are in your twenties it is better to go with the higher yield accounts such as mutual funds.
Your bank may offer an IRA savings account. Your bank may give you a few choices. You may be able to put it into a savings account where you would earn interest rates similar to a traditional savings account. You may also be able to put the money into CDs (certificates of deposit), which will give you a slightly higher rate of return on your money. This money is FDIC insured up to $250,000.00, but your rate of return is much lower than if you were to open your IRA at a brokerage firm.
IRAs at Brokerage Firms
You can also open up your IRA at a brokerage firm or with your financial planner. If you use your banks investing services, this would also be considered a brokerage firm in regards to the FDIC insurance. These funds are not insured, but have a much higher yield. You will make more money over time if you choose to open up your IRA with a brokerage firm. The easiest way to invest your money within your IRA is to go with a variety of mutual funds. You can choose a pattern similar to your 401(k) allocation.
Choosing the Right IRA
When you are in your twenties, it makes more sense to choose an IRA that allows you to earn a higher rate of return rather than putting it into a safer investment. When you begin to reach retirement age you may want to begin to switch your investments into safer slow growing products. If you have questions on how to distribute your IRA funds now, speak to your financial planner or broker. Be sure that you understand the risks and benefits associated with each choice.
You will also need to choose between a traditional IRA and a Roth IRA. With a traditional IRA, your contributions are tax deductible. However, you will need to pay taxes on your withdrawals. With a Roth IRA, you need to pay taxes on your contributions. However, you can withdraw your earnings tax free. Since you will withdraw more than you will contribute, it makes more sense to open a Roth IRA. You can max out your contributions to your IRA each year, and set up a monthly contribution amount go be transferred in automatically, to make the entire process easier for you.