How to Open An IRA Account
As we’re getting into the tax season, how to lower tax payment legally is probably on everybody’s mind. While most techniques you could employ to reduce your tax bill for the previous tax year already expired at the end of the year from, there is still one thing you can do to significantly cut your taxes before April 15th, depending on your income level. Not only that, it will also benefit your finance in the long term.
What I am talking about here is open an IRA account before April 15th tax deadline and make contribution for 2009 tax year. And if your modified adjusted gross income (MAGI) is $53,000 or less ($85,000 or less for married filing jointly), you can deduct the entire contribution up to $5,000 from your 2009 taxes. Because the contribution deadline for previous tax year is the same as the tax deadline, you still have time to make 2009 IRA contribution and take the tax deduction. That’s why this time around you will also see promotions from brokerage firms if you open your IRA account with them.
Even if you can’t make tax deductible IRA contribution or are not eligible for contributing to a Roth IRA directly, the new law that eliminates income limit for converting from a traditional IRA to a Roth IRA effectively make investing in Roth IRA possible for everyone.
Do you have an IRA account? If not, are you planing to get one before April 15th?
Where to Open an IRA Account
Actually, opening an IRA account is simple and you can set up with almost any brokerage firm, mutual fund company, or even peer-to-peer lending site such as Lending Club. But which one should you use?
One of the rules when I invest, not just in IRA accounts but taxable accounts as well, is to keep cost low in order to maximize the possible return. For an IRA account, you can get an account either from a broker or from a mutual fund company, depending no what you want to invest. If you want to buy stocks in your IRA account, then look for discount brokers such as Zecco, TradeKing, Firstrade, or Scottrade, may be the place to go because of their relatively low commission for trading stocks/ETFs. However, what you do have to keep in mind when selecting the broker for your IRA account is whether the broker charges IRA custodian fee or not.
Personally, I don’t buy individual stocks in IRA accounts because I want my IRA investments in the set-and-forget mode. For that reason, I only invest in diversified mutual funds. Though brokers like those mentioned above (the so-called mutual fund supermarkets) also offer thousands of mutual funds, buying funds from them will add unnecessary cost because they charge fees, usually much higher than commissions for trading stocks, for buying and selling mutual funds (see my discount broker comparison post to see how much brokers charge for investing in mutual funds). Though many discount brokers have funds in their no-transaction fee category (meaning you won’t pay commission to buy those funds), but it’s likely that the fund you want to buy is not included.
In contrast, mutual fund company doesn’t charge extra fees when investing with them directly. Thus, it makes sense to buy funds you like from the fund company directly in the long-term. The only drawback with this method is that if you buy several funds, all from different companies, you will have multiple IRA accounts to manage instead of just one. As for which fund company to use, a good place to start are reputable companies such as Vanguard, Fidelity, and T. R. Price, etc. With them, you can find a full line of products at relatively low costs.
What to Invest in Your IRA Account
Getting an IRA account is simple. Investing in it is not much complex either. In fact, you don’t have to know everything about stocks, mutual funds to start to invest for your retirement. Even if you know absolutely nothing, there are simple choices to let you start right away: just buy two funds while you are educating yourself about investing:
- A total stock market fund
- A total bond fund
at a 80/20 ratio (i.e., if you have $100 to invest in your IRA account, buy $80 in total stock market fund and $20 in total bond fund). Very simple, right? The best thing about this investment strategy is that by owning the entire stock market, you are exposed to all asset classes. Though the mix of each asset class in a total stock market fund may not give you the return you are looking for, it’s a simple and safe strategy. To make your life even easier, those fund companies, Vanguard, Fidelity, and T. R. Price, also offer lifecycle funds, a single fund consisting of both stocks and bonds that is managed by professionals who will determine the right mix of the two based on your time frame!
Once you know enough about stocks, mutual funds, ETFs, Treasury bills and bonds and investing and no longer satisfy with the two-fund portfolio, you can start to add other elements into your investments bases on, for example, the asset allocation of your choice with increasing diversification and reducing risk in your mind. You may as well increase your return
Photo credit: consumerboomer.com
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