What To Consider Before Opening An IRA

Opening an IRA is something which is relatively easy to do, as it is similar to opening a bank account or a facility with a savings and loan organization. There are virtually no restrictions involved in the actual opening of the facility, but there are many when it comes to actually investing money and using it for your own gain. It is important to understand right from the start what any individual IRA investment can do for you, and how you can integrate it with your overall plan for creating wealth to be used in your retirement.

It is best to do your research into the different types of IRA right at the start. Many of the more obscure types have now been effectively obsoleted by changed to what is known as a traditional IRA. This type of investment is still highly popular, despite the fact that you will need to pay tax on the money when it is withdrawn at retirement. The tax savings come as you fund the investment, and as you switch money from one investment to another as part of the investment process. The main alternative is a Roth IRA, which does allow the money to be withdrawn tax free at retirement.

The funding of an IRA is relatively flexible for those on a fixed income, as the limits are set annually. This means that you can budget throughout the year, making contributions in the months when you have relatively little money to spend, and saving the contribution money in the more expensive months. Those at a higher income level will probably find the limits to be restrictive, but this really creates the opportunity for a more balanced portfolio using a variety of investments. The structure of an IRA means that it is only really suitable for retirement planning.

retirement investment

Anyone who is thinking of opening an IRA should already have a clear idea of how and where they want to invest the money. There are some IRA plans which are highly restrictive as to the investments you can make, so if you are planning on investing in something outside of the usual securities you will need to make sure that it is permitted before you start. Investing in stocks is the main way to try to accumulate growth, but investing in individual stocks can be too risky for the average investor. The most common way to reduce this risk is by investing in mutual funds.

The most important point to make is that investments in IRA plans are designed to be carried through into retirement. There should be a safety margin between your expected income and the amount of money you are intending to invest in the IRA. There are always going to be times when money is needed for emergencies and for large expenses, so there are provisions for withdrawal. Most of these will incur severe penalties, with the exceptions being family related issues such as further education or medical bills.

If you are at the stage where you are ready to be opening an IRA, you will already have considered the alternative possibilities for investing your income. The priority should be given to investing in your own home, but if that is already being managed then there is no reason not to go ahead with investing in an IRA. If you are going to be making investments in securities in any case, it makes sense to structure your investment in the most tax efficient way. The main consideration is that you make sure of any restrictions, before you take the step of opening an IRA.