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The Truth About Protecting Your IRAs and 401(k)s: Let's Get it Started (IRA Style)

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What kind? How much? Where? At what cost? Steve Weisman walks you through the key items you'll want to think about before starting an IRA.

Starting an IRA isn’t generally something that’s considered a lot of fun, so let’s increase the enjoyment of the experience by giving it a little background music. Think “Let’s Get It Started” as sung by the Black Eyed Peas. Hum or sing along as you think about what you need to do to take the first steps toward a secure retirement.

The first thing you need to do is to decide what kind of IRA you are going to establish. Will it be a Roth IRA or a traditional IRA? You can check your eligibility and compare the advantages of each of these IRAs elsewhere in this book.

Once you have decided what kind of IRA you are going to set up, you should decide how much money you are going to contribute to your IRA of choice. It is important to remember that although the law limits the maximum amount of money you can contribute to an IRA, it does not set a minimum amount. I certainly advise people who can afford to do so to contribute as much as law allows them to their IRAs each year. However, something is better than nothing, and it’s a positive step just to get into the habit of contributing to an IRA. So if you aren’t going to contribute the maximum amount permitted by law, at least commit to making some contribution to an IRA. In fact, although banks are generally not thought of as a great place to have an IRA because the investment choices are limited, they may be a good place to get your feet wet when it comes to starting an IRA. Most banks can set up IRAs with minimal contributions as well as minimal or even, in some cases, no fees.

But where else is a good place to start an IRA?

A mutual fund company, such as Vanguard and Fidelity, is an excellent choice as the trustee of your IRA. Mutual fund companies offer an array of investment choices, and you are sure to find a mixture of investments you’ll be comfortable with. You may want to put all your IRA eggs into one basket such as a Target Mutual Fund, or you may want to spread out your IRA investment among a few different mutual funds within the same mutual fund company. The latter offers you a diverse asset allocation that can be quite helpful in planning for a safe and secure retirement.

If you want even more flexibility in picking your IRA investments, you may want to consider using the services of a brokerage firm, such as Charles Schwab, as the trustee of your IRA. With a brokerage firm, you can not only use mutual funds as the basis for your IRA investments, but you also can design your own portfolio of individual stocks and other investments for your IRA.

Fees

The same rule applies to IRAs as it does to every investment. It isn’t what you make that’s important; it’s what you keep. Particularly with a long-term investment such as an IRA that grows either tax deferred in the case of a traditional IRA or tax free in the case of a Roth IRA, the money you lose to excessive fees is money that isn’t growing and compounding for your future retirement. Fees are important. Make sure that you know all the fees involved with the particular investments and trustees that you choose.

Mutual funds have a variety of sales charges and other account maintenance charges. These are in addition to the charges you pay the trustee for managing your account. You also may have to pay an initial start-up fee when you set up your IRA and, of course, there are annual maintenance fees and fees for activities, such as sales of shares of stock that may make up your IRA’s investment portfolio. Make sure that you understand all the potential fees involved with a particular trustee and a particular type of investment you’re considering for your IRA.

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