- An IRA allows you to save up for retirement while reducing the tax burden you face either in the current tax year with a traditional IRA or during retirement with a Roth IRA.
- The best IRA account is one with little or no fees, great support, and a broad array of investment choices.
- Understanding what type of investor you are is key to picking the right account and platform/firm.
You only have one retirement, but you have numerous paths you can take to get there. Do you go with a traditional individual retirement account (IRA), an employer-sponsored 401(k), a Roth IRA or 401(k), or something in between? When it comes to IRA vs. 401(k) vs. everything else, understanding your retirement account and investment options is key.
To help you better understand your choices, let’s take a look at what makes the best IRA accounts and how to get the most out of them. If you’re completely new to retirement savings, feel free to take a step back and look at our retirement planning guide.
Why Choose an IRA?
Traditional IRA and Roth IRA are two of the most popular retirement account choices, and for good reason: Each offers unique, powerful tax benefits.
A traditional IRA provides financial relief by reducing your taxable income for the amount of the contribution. These contributions aren’t taxed, allowing your account to grow tax-free. So, if you contribute $2,000, that $2,000 will help lower your income tax at the end of the year.
This tax deduction can provide more immediate relief in that you reduce your taxable income, and possibly lower your tax bracket, thereby lowering the income taxes you owe. Earnings in your account will grow tax-deferred, meaning you won’t owe taxes on your money for as long as they remain in your IRA. However, your qualified withdrawals will be taxed at ordinary income tax rates when taken out. For many people, a traditional IRA is a great fit and the perfect way to start their retirement savings. If you think you’ll be in a lower tax bracket when you’re retired, this type of account makes even more sense, since you’ll be paying taxes on the withdrawals.
Roth IRA contributions provide a different tax advantage. Contributions to a Roth IRA are after-tax, but unlike a traditional IRA, qualified withdrawals from a Roth IRA aren’t taxed, meaning you won’t pay taxes on that money when you’re retired. Nor is the Roth IRA taxed when it’s inherited, making it a nice nest egg for your heirs if you plan on handing it down.
So, why choose one over the other? If you think you’ll be in a higher tax bracket when you retire, you’ll want to consider a Roth IRA. You’ll benefit from paying taxes on your contributions now, when your bracket is lower, while your account grows and eventually is withdrawn tax-free at retirement. If you’re young with time on your side, or your earnings exceed the income limits for a traditional IRA, a Roth IRA could be a great choice.
As always, you may find it helpful to consult with a financial advisor first.
What Makes the Best IRA Account?
An IRA can make your funds go a lot farther than a taxable savings or investment account can. But, all IRAs are not equal. Financial institutions, stockbrokers, life insurance companies, and mutual funds are all outlets that allow you to open an IRA, but each one can have different criteria associated with the accounts they provide.
There are numerous criteria you can look out for that will help you choose the best IRA provider and get the most bang for your buck.
Account Management Fee and Other Fees
Fees can, and often do, eat into your precious retirement savings, so be smart about selecting the best IRA provider for you by watching out for the fees charged.
Some brokerage firms will charge annual maintenance fees or management fees for housing your money. These account fees can be worth it in some cases, as a great broker may offer personal customer support and take care of your financial planning. However, more and more firms offer investment choices and planning services with lower fees.
Other fees to watch out for are trading fees, annual fees, and redemption fees. If you’re going to manage your IRA investments yourself and anticipate moving your money in and out of stocks, bonds, or other investments, you’ll encounter trading or transaction fees that apply anytime you make trades (buy or sell). Consider low-cost brokerage firms or trading platforms that have low trading fees if that’s the case.
Other firms charge a redemption fee if you decide to take your money out of the investment funds in your IRA. These fees are not related to the taxes and penalties levied by the IRS, but are instead for the broker’s benefit.
Some firms will require an account minimum or minimum investment for your IRA, but again more and more firms have dismissed this requirement, and that helps anyone who wants to get started with their retirement savings. If you’re new to investing and just starting off with retirement planning, try to avoid any IRA with a minimum balance requirement because it will likely involve paying a fee if your balances are too low.
Your best IRA will offer you a broad array of investments, such as mutual funds, Exchange Traded Funds (ETFs), stocks, bonds, and more. You want to have alternatives you can choose from, rather than a few stocks or other investments presented to you. There can be a dizzying array of choices for a newbie investor, so you want to look for an IRA provider that will assess your financial goals and retirement needs before recommending any investments. More on how to invest in your IRA below.
Guidance and Support
Whether your IRA comes with no or low fees or is managed by a paid financial professional, make sure the IRA provider you’re going with offers financial guidance or support. Nearly all investors with IRAs require support at some point, so do some research on the IRA provider or brokerage firm you’re interested in and see how their support is rated.
How to Invest in Your IRA
Now that you know what to look for in an IRA, it’s important to understand how you go about investing in one effectively. You need to understand your investing style. This can be broken down into three different categories:
If you have some financial knowledge or aren’t afraid of doing some extensive research and being hands-on, the DIY investment route is always open. With this do-it-yourself option, you’ll handle your IRA investments all on your own. If you have experience with investing and are comfortable with how the stock market works, this can be a good way to avoid any kind of investment management fees. Read up on investing basics first and consult with a financial advisor before diving in.
Financial Advisor Who Is a Fiduciary
If you have some idea of what you want out of retirement, but would prefer someone act as the point person for your retirement and investments, a financial advisor or financial planner such as a CFP® acting as your fiduciary is a great route to take. A financial advisor who operates under the fiduciary standard has an ethical obligation to keep your best interests front and center when managing your finances.
Somewhere between DIY investing and the financial planner route is the robo-advisor. With a robo-advisor, you pick an investment platform and typically answer some questions about your short- and long-term financial and retirement goals. The robo-advisor uses technology to then suggest where your funds should go. There can be low fees and one-on-one advice associated with these, but they do offer freedom with enough guidance to reduce the risk that your hard-earned tax dollars are inappropriately invested. Read up on your choices for top robo-advisors to get an idea of whether or not this route is right for you.
Getting the Most out of an IRA
There’s a lot more to building a healthy retirement sum than simply opening an account and making contributions. There are a number of small steps and tweaks that can help you get the most out of your IRA and build the best future retirement possible.
- Know the contribution limits: There are contribution limits with all types of IRAs. Make sure you know the contribution limits to avoid penalties and the hassle of reversing excess contributions later. In 2019, the IRA contribution limit was $6,000, or up to $7,000 for those 50 and older. If you hit your contribution limit regularly, consider opening a taxable brokerage account that you can invest in.
- Be aware of tax deadlines: Heed the tax deadlines when investing in a traditional or Roth IRA. Contributing before this deadline will allow you to get the tax deduction that comes with a traditional IRA, so make sure you contribute before the cutoff. Typically, the IRA tax deadline is April 15 of each year.
- Automate contributions: Pay yourself first. If you can, automate your contributions to your IRA. If you set up your account or used a broker or robo-advisor, consult with support for your account to see if you can have your contributions set for a particular day each month. This will ensure you don’t forget to contribute, and allow you to calculate ahead of time whether you’ll hit the contribution cap.
- Consider your personal financial situation: Lastly, think about your personal financial situation before investing too heavily. Do you have a high risk tolerance for investing, or are you wanting a safe but slower growth investment? How long until you plan on retiring? What are your retirement savings right now? These factors will help you determine what kind of savings plan you need to put in place.
The Best Your IRA Can Be
The best IRA account can only go as far as you let it. Research any account fees or terms and investment choices before choosing where to open your IRA, invest what you can, and supplement your IRA with other funds or investments if you find you’re hitting your contribution limits.
You get one retirement, and a little effort now can pay off in a big way later. You work hard for your money, so make it go as far as it can and enjoy the rewards when it’s time to start that chapter.