Introducing IRAs

You should check out an individual retirement account (IRA). You shouldn’t have any trouble finding a custodian who’ll hold the assets you put into your account. Banks, credit unions, investment companies, and brokerage firms all offer IRAs and are eager to have you as a client. The only requirement is that you have earned income. That’s money you’re paid for work you do.

Each year, you can contribute up to the annual cap the government sets in any investments available through your custodian. You just can’t contribute more than you earn.

If you’re participating in an employer’s retirement savings plan, you can still contribute to an IRA. And if you’re not in a plan, an IRA is a great substitute.

Choosing an Account

All IRAs are alike in one key way. Any earnings the investments in your account provide grow tax-deferred. That distinguishes them from earnings in taxable accounts, on which tax is due every year on the earnings that are paid. Tax-deferral means your account can compound faster than an account from which you withdraw to pay taxes.

But IRAs come in different styles, so you’ll want to find the one that will suit you best. In a traditional tax-deferred account, earnings are deferred until they’re withdrawn and then taxed at the same rate as your ordinary income. Normally, you don’t withdraw before you’re 59½ and must start withdrawing, if you haven’t already, when you turn 73.

Some but not all IRA participants qualify to deduct their contributions to a traditional IRA. Anyone who isn’t eligible for an employer plan can deduct, as can anyone whose adjusted gross income (AGI) is less than the limit the government sets each year. In both cases, whether you’re single or married affects the limit.

In a Roth IRA, earnings are not taxed at withdrawal if you are at least 59½ and your account has been open at least five years. In addition, no withdrawals are ever required. But you have to be eligible, based on your AGI, to contribute to a Roth IRA.

Assuming you qualify for more than one type of IRA, what you’ll want to consider is whether you’re most likely to pay less tax over your lifetime by deducting your contributions now or being entitled to tax-exempt withdrawals later.

Picking Investments

Since IRAs are designed to meet your long-term financial needs, you’ll want to have a plan for building your account. Unlike a 401(k) or similar plan, where you choose from a menu of investment options, in an IRA you have essentially free rein—though it does mean you take more responsibility for the outcome.

One approach is to buy mostly stocks and stock funds while you’re just starting your career. They’re designed to grow in value and may pay dividends that can be reinvested to increase your account value. Over time, you may want to add income-producing investments for greater stability.

The key is to diversify at every stage, which means choosing a variety of investments within each category.

Tracking Performance

Investing in an IRA isn’t—or at least shouldn’t be—a one-time activity. As your portfolio grows, you’ll want to keep track of how your investments are doing and whether your account is increasing in value. That means you need to be prepared to make changes, typically by selling some investments that have been disappointing and buying new ones that you think will make a positive contribution.

But you have to be realistic. If stocks, in general, are struggling to stay in positive territory as they sometimes do, selling the ones you have and replacing them with others may not improve the results. But you may want to replace an investment that’s lagging in a growing market or one whose issuing company seems to be in serious financial trouble.

Naming Beneficiaries

An essential part of opening an IRA is choosing a beneficiary to inherit the account if you should die. In fact, you’ll probably want to name at least two: a primary and a contingent to inherit if the primary can’t. With those designations in place, there should be no question about who is entitled to the account at your death. And remember, you can always change your mind and update the designation.

For example, you might name a parent or sibling initially and change to your spouse or partner when you have one.