How to Best Use an IRA
- 1). Examine the other retirement savings options you have available, including the 401(k) or 403(b) plan at your workplace. Contributing to these funds lowers your taxable income and gives you an immediate tax break, so it makes sense to prioritize those contributions. Even if you do not max out the 401(k) or 403(b) plan at your workplace, it makes sense to put in at least enough to get the full company match. You can concentrate on your IRA contributions as well, but do not overlook the value of your workplace retirement plan.
- 2). Review the other assets you have saved for retirement, including both personal savings and money in pensions and retirement plans. The higher your level of assets, the more income you are likely to have in retirement. If you expect to have a high income in retirement, contributing more to a Roth IRA can save you money on taxes. If you expect your income to be lower when you retire, look instead at a traditional IRA. A traditional IRA provides an immediate tax break, while a Roth IRA does not. The tax advantages of a Roth come in retirement, when you can withdraw the money tax-free.
- 3). Determine how much you can afford to put into your IRA during the current year. In 2011, you can contribute up to $5,000 to a traditional or Roth IRA, plus an extra $1,000 if you are 50 years of age or older.
- 4). Contact several low cost mutual fund companies and ask about opening an IRA. Ask about any fees or maintenance charges to which you may be subject. If you shop around, you can find an IRA that does not charge these kinds of fees.
- 5). Use an index fund for the bulk of your IRA. Index funds do not attempt to time the market or pick and choose stocks. Instead they simply buy and hold all of the stocks in a given index. Over the long term, index funds have consistently beaten most managed mutual funds. In addition, the cost of an index fund can be as low as 0.10 percent a year, compared to 1 percent or more for many managed funds.
- 6). Review your asset allocation -- the mixture of stocks, bonds and other investments -- in your IRA on an annual basis. As you get closer to retirement, it makes sense to move more of your assets to lower risk investments. If you are still decades away from retirement, keeping most of your money in stocks may provide a better return.
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