How to Set Up an Online IRA - dummies

By Matt Krantz

Practically everyone can fund an IRA if he or she has the money. But IRAs are especially attractive if you don’t have access to a 401(k) at work (perhaps because you’re self-employed) or if the 401(k) at your company doesn’t offer a match. IRAs, like 401(k)s, offer big benefits when you’re saving for retirement. The Investor’s Clearinghouse provides links to online resources to help you decide whether an IRA will work for you.

Several types of IRA(s) exist, but you should really concern yourself only with the big three:

  • Traditional IRAs are available to anyone. They’re a great place to save money for retirement because you can put away as much as $5,500 in 2015, and $1,000 more if you’re over at least 50 years old.

    Capital gains and dividends in a traditional IRA aren’t taxed until you take out the money. And, you might be able to deduct your contributions if you’re not covered by a company-sponsored retirement plan. If you or your spouse is covered by a company plan, the amount you can deduct is reduced based on how much you earn. The rules get complicated, but Fidelity has an excellent primer that explains how much you may contribute. Click the IRA Contribution Calculator link.

    Even if you can’t deduct your contribution, a traditional IRA might still make sense for you. A nondeductible IRA can be a great place to stash investments that generate nonqualified dividends and interest, such as REITs and bonds.

  • SEP IRAs are designed for owners of small businesses, employees of small businesses, and people who work for themselves. They’re easy to set up and allow employers — including self-employed people — to contribute up to 25 percent of compensation to a limit of $53,000 in 2015. Vanguard provides more information about these plans.

  • Roth IRAs are one of the best things going, and if you can open one, you should. With Roth IRAs, you pay now and play later. You can’t deduct contributions when you make them, but you can take out the money in the future tax-free if you’re at least 59½ years old and owned the account for five years or longer. And unlike traditional IRAs, you’re not required to take out the money at a certain age, allowing you to pass the giant, tax-free nest egg to your kids. Just imagine the power of compounding on an investment sitting untaxed for more than a lifetime. It doesn’t get much better than that.

    Roth IRAs are generally best if you think your tax rate will be higher in the future when you retire. It’s impossible to know what Congress will do with tax rates in the future. That’s why many financial advisors say it’s better to go with a Roth, lock in the rates now, and protect yourself from the risk of higher tax rates later. But if you’re certain you’ll be in a lower tax bracket in the future, a Roth may not be for you.

After you’ve made your decision about what type of retirement account you’re interested in — be it a traditional IRA, Roth IRA, or SEP IRA — you need to find a broker to set it up. Nearly all the online brokers are equipped to set up all these accounts. But before signing up, make sure that there are

  • No extra fees or higher commissions: In fact, online brokers might cut you special deals on your IRA accounts. This is something to look for when evaluating online brokers.

  • Plenty of low-cost investments to choose from: Most brokerages let you invest in both individual stocks and mutual funds with IRA accounts.

Okay, so you’ve decided on a plan for saving for retirement and you’ve picked the type of accounts best suited for that plan. But how much do you need to save? Most of the preceding sites help you answer that question. The Choose to Save site takes a simplified approach by giving you a Ballpark Estimate of how much you’ll need.

And Analyze Now! provides a Free Programs section stuffed with spreadsheets that can help you answer many of the questions you need to be asking yourself. In fact, the site even has an Investment Manager spreadsheet that can help you choose the right kind of accounts for planning your retirement. Index Funds Advisors’ Retirement Analyzer uses an advanced statistical analysis to examine the range of possible outcomes for your retirement savings. Using its statistical model, the IFA Retirement Analyzer tells you how much to contribute based on whether the market does well, poorly, or something in between.