Opening an IRA

Anyone under age 70-1/2 who has earned income (income from employment, not including investment or rental income) can open an IRA. 

Opening an IRA is easy and you can do it through your bank. All you need to do is fill out a couple of simple forms. Your bank will act as your trustee (the organization to whom the management of your IRA is entrusted).

The best way to save for retirement is through regular contributions. Your bank can set you up with automatic deductions from your checking or savings account, or you can pay by check when you’re ready to add money to your IRA.

IRA Investment Options

Your IRA is a special, tax-exempt investment account. Like your investment account at a brokerage house, it can contain a wide variety of types of investments. Here are some of the most popular types of investments.

Certificates of Deposit (CD’s): A time deposit giving the bank the right to hold your money for a fixed period of time. In return, the bank gives you a higher rate of interest than you would normally get in a savings or money market account, where you may withdraw your money at any time. With a CD, there are generally stiff penalties for early withdrawal.

Stocks: Partial ownership in a corporation through the purchase of shares of that corporation. Stocks are bought and sold “over the counter” or through a broker. Brokers trade stocks in the stock market.

Bonds: Essentially a loan to a corporation or government entity which pays you interest.

Mutual Funds: An investment program by which you pool your money with that of other investors to form a “fund” which then invests in stocks from many corporations or a group of bonds. They are exceedingly popular because they allow you to diversify your investment. They are professionally managed, liquid, and convenient for most investors.

Money Market FundsThis is a mutual fund that invests in U.S Treasury Bills and Notes, large certificates of deposit, commercial paper and bankers’ acceptances. Its goal is to protect your capital while showing a modest return. It will always return more than regular savings accounts, but usually less than the current CD rates. Money markets are very liquid and good places to “hold” your money while considering where else to put it.

A rollover IRA is simply a special IRA into which you place moneys that had already been invested in a special retirement program sheltered from taxes. There are times when you might need a rollover IRA:

• You’re leaving a company in which you have accrued employer-sponsored retirement plan benefits.
• You receive a lump sum distribution of your spouse’s retirement account as a result of death or divorce.
• You have an IRA with a bank or broker and want to take advantage of an investment opportunity at a different location or with a different trustee.

Normally, you would be subject to withholding taxes and penalties for early withdrawal if you simply took the money yourself. However, a rollover IRA shelters you from these taxes and penalties. It basically lets you move money from one retirement account to another.

You open a rollover IRA account the same way you open a regular account, but you must specify that it is a “roll-over IRA.” You should also tell your employer or the bank holding the IRA from which you are moving the money, that you want it transferred directly into your rollover IRA account.

Keep the money in your roll-over IRA separate from that of any IRAs you may have that you make regular investments into. This allows you to then move the funds into another employer-sponsored plan if you wish.

Withdrawing Money From An IRA

Your IRA is as liquid as the vehicle (CD, mutual fund, etc.) you have invested in. If you want or need to withdraw money from your IRA before you retire, you can. But you will be subject to certain taxes and penalties, so make sure your really need that money before you take it out. Remember, early IRA withdrawals may jeopardize meeting your retirement goals.