Today’s workers have more options than ever when it comes to saving for retirement. Even if you are self-employed or if you work a non-traditional or part-time job without 401(k) benefits, you have three great options: a Traditional IRA, a Roth IRA, and the newest of the bunch, a myRA.
Each type of IRA has different qualities. To figure out which one is right for you, it’s important to know your own goals. The secret to good investing, and the hardest challenge is always figuring out how to match the products in the market to you and your life.
I'm going to outline the basic attributes of each kind of plan and offer a few guidelines on how they work for different investors. Let's go in chronological order, because a lot of successful investing is about starting early.
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- The basics: A myRA is the simplest, lowest cost and safest retirement plan. If you are uneasy about investing and want to wade in at the shallow end of the water before you jump in the deep water, a myRA is a great choice.
- Who it's good for: Beginning investors.
Things to know about myRAs:
- You can invest $5,500 a year.
- A myRA is a type of Roth IRA.
- The investments are after-tax. You won't get a tax break on them when you put the money into the account, but investments will grow tax-free. And when you retire, you can withdraw all the money tax-free.
- When you hit $15,000, you must roll the money over to a Roth IRA. The government basically forces you to jump into the deep end at that point.
- MyRAs have no fees, but you can only open one if you are not covered by a retirement plan at work.
- MyRAs are backed by a Treasury Security, which means returns are limited, probably to less than three percent a year based on past performance. But that means you can't lose your money.
The other good thing to know about myRA is that if you own a small business, even a tiny one that can't afford to provide retirement plans, this is a great way to help your employees save. Just follow this link.
- The basics: Roth IRAs offer a way to save for retirement. You'll still have good access to the money if you need it for an emergency, or to buy a house or help fund your education. A Roth IRA is kind of like swimming into the shallow end of the pool: as long as you keep your investments straightforward, it's easy to get out.
- Who it's good for: Investors who don't need tax breaks now, and people who want to save without losing access to their money, and young people who are especially likely to be paying higher taxes in retirement than they are now.
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Here are some things to know about a Roth IRA:
- Just as with a myRA, you put in after-tax money, which grows tax-free over the years. You can withdraw money tax-free if you need it before retirement, subject to some rules. You withdraw the money without paying taxes in retirement.
- You can save $5,500 in a Roth IRA this year (the amount changes from year-to-year). That's the total you can save combined in a Roth and a Traditional IRA if you have both.
- You can open a Roth IRA at any of the big brokerages, like Fidelity or Schwab. You'll probably pay two kinds of fees: one fee for the brokerage to hold your account, and the fees on underlying investments.
- At most of the brokerages, you can invest in almost anything you want through a Roth IRA, from individual stocks and bonds to mutual funds. One great idea if you don't want to spend too much time on your investments is a low-fee target date fund, which is set up to automatically adjust as time goes on.
- The basics: Traditional IRAs are like the old-school way of learning to swim: Throw yourself into the deep end. Traditional IRAs give you a tax break on the money you put in, which can help encourage you to save more. But if you withdraw the money, you'll have to pay taxes and a penalty. Traditional IRAs, like Roth IRAs, give you lots of investment options.
- Who it's good for: Investors who have already maxed out their retirement plans at work, people who want a tax break now, and people who already have a cash reserve of three to six months built up.
Things to know about Traditional IRAs:
- You get a tax break on the money you put into a Traditional IRA, up to the contribution limit. You deduct your contribution from your total income for the year.
- You can save $5,500 in a Traditional IRA this year (the amount changes from year-to-year). That's the total you can save combined in a Roth and a Traditional IRA if you have both.
- You can open a Traditional IRA at any of the big brokerages, like Fidelity or Schwab. You'll probably pay two kinds of fees: one fee for the brokerage to hold your account, and the fees on underlying investments.
- At most of the brokerages, you can invest in almost anything you want through a Traditional IRA, from individual stocks and bonds to mutual funds. Just as with a Roth, you can investigate a target date fund, which is set up to automatically adjust as time goes on.
Your biggest ally in retirement savings is time. If you put in $150 a month, or about $5 a day, you'll have saved enough in your myRA, about $17,000, to shift to a Roth IRA, assuming a two percent annual return.
If you put money into a Roth IRA with a target date fund that returns about six percent a year, you'll accumulate more: about $22,000. And if you use a Traditional IRA, you'll accumulate about the same amount, but you will have had the tax break on top. Whichever IRA you chose, the most important thing is to start now.
Elizabeth MacBride is a writer and editor for RothIRA.com and TraditionalIRA.com. She is an expert in translating complex financial topics, including the latest research, into actionable advice that is easy to understand. Her work has appeared on CNBC, Forbes, BBC Capital, Investment News, HBR.com and man