Where to Open an IRA

If you have money to invest, you may wonder where is best to open an IRA. It’s an important decision because your IRA provider will hold one of your most important assets – your retirement nest egg. Depending on how things work out, your retirement can be a dream come true or a nightmare.

What Do You Want?

As you decide where to open an IRA, it’s best to consider what exactly you want. Once you know this, you’ll know what features to look for (and what to avoid). Start by asking yourself the following questions:

Retirement container

An IRA is a container for your retirement savings

  • Do you want to invest for growth and income, or do you just want a safe place to stash some cash?
  • How comfortable are you making investment decisions?
  • How often will you review your IRA holdings? How much time are you willing to spend on this?
  • Do you have your heart set on any particular type of investment (individual stocks, ETF’s, specific mutual fund brand names)?
  • Do you want to pay somebody to handle everything for you, or will you do it yourself?

Here’s the good news: no matter what your answers are to those questions, you can open an IRA that will give you what you want.

What You Get from an IRA

It may be helpful to quickly review what exactly an IRA is and what you can do with one. An IRA is simply a type of account with certain tax benefits. IRS rules govern how assets move in and out of the account, and there are some restrictions on the investments you can use in an IRA. However, there are plenty of ways to invest in your IRA, including (in order of difficulty):

  • Certificates of deposit (CDs) and savings accounts
  • Mutual funds
  • Individual stocks
  • Individual bonds
  • Writing covered calls
  • Owning real estate

Most people are happy with the first few items on that list, but others like to use more sophisticated strategies. While you can certainly get creative, it’s a good idea to talk to a CPA to make sure you’re not going to break any IRS rules.

As you can see, you can use an IRA for a variety of investments. But not every IRA provider allows every type of investment, so you have to keep this in the back of your mind as you decide where to open an IRA.

Banks and Credit Unions

If you are an ultra-conservative investor, you may find that a bank or credit union is the best place to open an IRA. You can open CDs and you savings accounts in an IRA, just like you would with your individual or joint account at the bank. If safety is your main concern, no bank is better than any other bank – as long as your money is insured by the FDIC or NCUA. Just look for a bank that pays well, and make sure you keep your accounts under the insurance limits.

Remember that the trade-off of safety is (usually) lower returns. You won’t lose money at the bank, but you might lose purchasing power over the long term due to inflation.

Do It Yourself (DIY) Investing

There are a lot of great places for DIY investors to open an IRA. Almost any discount brokerage or mutual fund company can handle IRAs. Again, keep in mind what you want to invest in as you decide where to open your IRA. If you want to invest in individual stocks or bonds, don’t choose a mutual fund company. Instead, look at discount brokers like Schwab, Fidelity, or E-Trade. Note that some of these discount brokers also allow you to buy FDIC insured certificates of deposit (so, if you want some of your money in CDs, you might be able to do it all in one place).

If You Need Help

If you’re not an expert investor, you might benefit from a little bit of help. There are several ways you can get help with your IRA (listed below in order of “helpfulness”):

  • Use a target date or target risk fund
  • Speak with a phone representative who will give you advice
  • Meet with a financial planner or money manager who will handle everything for you

Asset allocation funds (such as target date and target risk funds) might be an option if you just need some help spreading your money around. You might know that you should “diversify” but be unsure of how best to do it. Asset allocation funds typically take a sophisticated approach to diversification. The main thing you need to do is figure out how much risk you want them to take, and find the right fund.

Phone representatives at discount brokerages might also be a resource. Verify this as you research where to open your IRA. You might have to pay a small fee, but you can often get some basic information, and it might be enough for your needs. Just remember that you’re talking to somebody who doesn’t know much about you and might be limited in terms of how much they can say (although they may be competent and have the best intentions).

Financial planners can also help you open an IRA, and they may even do most of the paperwork for you. If you just want to have somebody else handle everything (and you’re willing to pay for that service), find an experienced financial planner who takes an interest in you and your goals.

A Word about Annuities

As you do your research, you may hear that you should open an IRA with an insurance company. Insurance companies typically offer annuities as their IRA product. There are certain benefits that come from using annuities, but (as you’re smart enough to know) you have to give something up to enjoy those benefits – usually in the form of your money. Make sure you learn about both the pros and the cons of annuities before signing up for anything.

Also, remember that tax deferral is not a relevant benefit. Your money will already enjoy tax deferred growth because it’s an IRA – so there needs to be some other reason to use an annuity.

Photo credit: Tax Credits