They say they as you lay your bed, so you must lie on it. This statement is very true when it comes to your savings for retirement. It is never too early or too late to put some money aside for the silver days, and it is best not to rely entirely on your employer, even if they offer generous 401 (k) plans.
The best solution is to start contributing to an IRA (Individual Retirement Account) and secure some additional funds, up to an IRS-specified limit, currently set at $5,500/ year or $6,500/year if you are over 50. Here are a few questions to ask yourself before signing a deal with a provider.
Traditional or Roth?
Since both IRA types are capped to the same amount, that is not a decisive factor. The first choice you have to make is between a traditional IRA and a Roth IRA. This is, in fact, deciding between paying taxes now or later. You have to think if your expected taxes will be higher or lower once you retire.
For a traditional IRA you get a tax deduction for the funds you save during that year. That means that you will not pay any taxes during your active years, but once you start withdrawing money from the IRA account, you will pay taxes according to your respective bracket. This move makes sense if you expect to be earning less during retirement compared to your working life, therefore being in a lower tax bracket.
The Roth IRA is created with money that has already been taxed once, in the current year, in the according to the respective bracket. Therefore, once the person has retired, they can withdraw funds with no additional worry about taxes. This approach makes sense if you are now earning less than you expect during your retirement.
Choosing either of these is a gamble since you can never be sure about the level of your future earning or legislative changes in the next decades.
Do You Want to Invest?
If you are more the proactive kind, you might not be satisfied with the investment plan which comes with your IRA by default. These usually include bonds, mutual funds, stocks, certificates of deposits as well as other investments.
If you have a low appetite for risk, you might feel comfortable with CDs (certificates of deposit) which have a low return rate, around 1%, compared with the market which usually yields as much as 6%. It is also a matter of your current age and how many years you expect to remain active.
Who Will Be Your Account Custodian?
If you are comfortable in the land of investments, you can have a self-directed IRA, but most people choose a reputable custodian to do the thinking and management work for them.
You can choose between:
- the safe and low return option provided by banks, which usually offer CDs and money market funds
- mutual funds
- brokerage companies if you want to diversify your portfolio with stocks and bonds
- insurance companies who offer annuities and other perks, like life insurances
Before you sign up for an IRA account be sure to check all available options. The things you should look for when making your final decision include investment options, the the minimum required amounts, and last but not least, fees.
Look for clues about the trustworthiness of your custodians such as proof of excellent customer service, the lack of restrictions considering your investments, and a broad selection of possible investment tools to suit your needs and risk profile. Even having a great and friendly website or app can show how much they care about their customers.