How to Pick an IRA (And Why You Should)

If you’re just starting out in an investing journey, first of all, good for you! Taking the first step toward investing is something that can feel overwhelming. However, it is an important and valuable step toward setting yourself up for financial success. One of the first things that you might hear about is an Individual Retirement Account, or IRA. An IRA is an investment account that you can use to invest that comes with some tax advantages. There are 2 main types – a traditional IRA and a Roth IRA.

Why you should consider an IRA

The power of compound interest says that the earlier you start saving, the better it will be for your retirement. In a traditional (non-IRA) investment account, you are responsible for paying taxes on any gains that you incur. However, with both a Traditional IRA and Roth IRA, the money you invest within the account grows tax-deferred and also allows for either a tax deduction on the money you contribute in the year you contribute (Traditional) or allows for tax free money when you withdrawal the money in retirement (Roth). In other words:

• Traditional IRA, you contribute now with pre-tax money (meaning you get a tax deduction in the year you make the contribution) but pay taxes when you withdraw the money in retirement (after 59 ½ to not incur a penalty).
• Roth IRA, you pay with after-tax money (no tax deduction in the year you make the contribution) but when you withdraw the money you don’t have to pay taxes (after 59 ½ to not incur a penalty).

Regardless of which option you choose, here are some tips for how to pick an IRA.

Decide how much investing help you want

The first thing that you’ll want to decide is how much investing help you’ll want. There are a variety of different options available for all sorts of investment accounts, including IRAs. The 4 main categories that you’ll want to decide between are:

• Discount brokerages – These are with custodians that will allow you to have complete and total control over your account. The good news is that this will allow you to invest in most types of stock or investments. The bad news is that if you have specific questions, you don’t have a dedicated professional to guide you. Fees are usually lowest with a discount brokerage.
• Self-Directed IRA (SDIRA) – If you’re an advanced investor, you may want to also consider a fully self-directed IRA. While most IRA Custodians allow you to invest in stocks, bonds or index and mutual funds, with a Self-Directed IRA you have a lot more ways to invest your money, such as real estate, commodities, tax liens or precious metals.
• Robo-advisors – Relatively new onto the scene within the last ~10 years are companies that serve as “robo” advisors. These companies such as Betterment, Wealthfront or Ellevest allow you to use software algorithms to manage your portfolio. Most robo-advisors have a free version that might give you an idea of how to construct your portfolio. If you want more guidance than that, you can upgrade to a paid plan that might include auto-rebalancing or access to a human advisor.
• Full-service IRAs – The final option would be to go with a full-service brokerage. Typically a full-service brokerage will charge a fee ranging from 1% to 2% of the total assets being managed.

Generally speaking, the fees go from low to high as you move down the above list, and that’s another factor that you want to consider. Even a 1% fee on your total assets can make a huge difference in your overall returns after a 30 year time horizon.

Pick an IRA custodian that you trust

After you’ve decided how much investing help you want and what type of brokerage you’re looking for, the next step is picking your actual IRA custodian. That company will be the one who actually holds your money. The US Securities and Exchange Commission has a guide on working with an investment professional that can help you as you look to pick an IRA Custodian.

If you’re an advanced investor looking to open a Self-Directed IRA to invest in a specific investment type, then that will help you as you pick an IRA custodian. Different IRA custodians offer different investment options, so make sure to pick a custodian that offers your investment of choice.

Fund your account and pick your investment options

The last step in how to pick an IRA is to fund your account. While I wouldn’t recommend picking an IRA custodian solely based on this, there are brokerages that offer bonuses for opening an IRA with them. These welcome bonuses generally range from $100 to $500, depending on the size of account that you are opening. 

Once you’ve opened and funded your account, it’s time to set up your investment options. Invest your money in a diversified portfolio that matches your overall risk tolerance and goal for retirement. After that, you will be able to sit back and let the power of compound interest work in your favor. Congratulations on taking a great first step towards securing your retirement!