What is Required to Open an IRA?

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In planning retirement investing, many people look only at the options offered by their employer, primarily 401(k) or pension plans. However, for those who wish to invest outside of their 401(k) plan or do not have such an option available, there are many other investment vehicles available.

One of the most common is the Individual Retirement Account (IRA). Established in 1974 as part of the Employee Retirement Income Security Act (ERISA), IRA's are retirement investment accounts created and owned by one person for their benefit upon retirement. In many ways, they are similar to 401(k) plans, but there are some marked differences which make them ideal for some investors and less attractive for others.

Qualifying to Open an IRA

The requirements to open an IRA are simple. You must be less than 70 1/2 years old and you must have earned income, meaning wages or self-employment income. Even minors can qualify to open an IRA, provided they are earning an income. You may also open an IRA even if you participate in your employer-sponsored 401(k) or some other tax-favored retirement plan.

Types of IRA Accounts

There are several different types of IRA's, including:

  • Traditional IRA

  • Roth IRA

  • SIMPLE IRA

  • SEP IRA

  • Self-directed IRA

Traditional and Roth IRA's are the most common types of individual retirement investments. SIMPLE and SEP IRA's are most often used by those who are self-employed or work for small businesses that do not have a retirement plan for employees. Self-directed IRAs allow the individual to make investments on behalf of the retirement plan. Your investment advisor will help you choose the plan that is right for your circumstances.

Opening an IRA

There are three places where you can open an IRA, and each will have different minimum deposit requirements and investment options. Most banks and credit unions offer IRAS, typically requiring a $500 to $1,000 opening deposit. Investments are limited to cash accounts, such as money funds and CDs. You will get a lower rate of return, but this may be a good option if you are undecided as to the investments you want to use.

Another place you can open an IRA is a mutual fund company. You will need a minimum of $1,000 to open an account, but you will have a broader range of investment options. Mutual funds are made up of a mix of stocks and bonds, varying from highly conservative to very aggressive. These funds allow you to invest in a variety of accounts and spread the risk among many investors.

Finally, you could choose to use a traditional brokerage company. Again, you will need at least $1,000 to start the account. Using a broker will allow you to invest not only in mutual funds but also by individual shares of stock in many different companies. This can be a good option for people who need more guidance in determining how to invest their money.

An IRA can be a useful investment option for many people as they plan for their retirement. These accounts are easy to open and manage and can also provide needed tax deductions. Talk to an investment advisor about which type of IRA would work best in your overall retirement plan.

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