Investing - Saving for Retirement part 2 - IRA's

If you do not have a company sponsored retirement plan (401K, 403B, Pension), saving for retirement in a traditional IRA might be right for you, since there are tax benefits. Although the limits on what you can contribute are much lower than a 401K, you really don't have too many other options.

However, a Roth IRA, in my opinion, is a much better option for everyone, including those who have a company sponsored plan. Here's are some of the differences that illustrate why:

A traditional IRA is funded with pre-tax money. A Roth IRA is funded with after tax money.

What this means:

If your company does not have a plan, you can contribute money to your traditional IRA and write the amount off on your taxes. When you get old and start taking distributions, you pay tax on the money then. The theory is that when you are no longer working, your tax bracket will be lower, and you will pay less in taxes. I think this theory is flawed, due to the growth factor, which is summarized below.

Money you contribute to a Roth IRA cannot be written off your taxes, but since you funded your account with after tax money (meaning you already paid income taxes on that money), when you withdraw the money, it's tax free.

Over time, either IRA will grow at a rate of 6%-8% a year, on average. Over the course of 30 years, when you are ready to withdraw the money, you don't pay income tax or capital gains tax. The money is yours, free and clear.

If I had to recommend an account to open, the Roth IRA is my choice. Look for a low cost provider such as Vanguard or Fidelity. These companies don't charge any account maintenance fees if your balance is above a certain amount.

All right, so you've opened an account. Now what should you invest in? Next post...