help regarding Traditional IRA

gekkoplus · #1 (**permalink**) 02-05-2008, 11:35 PM

This might be a noob question but how should I open a traditional IRA account? I also request some advice regarding which bank to choose etc..

Our trusty turbotax software popped up a message while performing tax calculations that we can save about 1.5K in taxes if we open a traditional IRA of 6K by April 15. (2K for me and 4K for spouse).

My employer supports 401K and my spouse is unemployed. I never had an IRA account before. I am curious about the process of opening an IRA account. Is it as simple as opening any regular bank account? Can I deposit my money in CDs? Should I prefer one kind of bank over other? (credit union, big name banks, broker etc.)

1.5K over 6K is substantial gain (25%) - or am I missing any other implications of IRA other than just tax savings?

sweeps · #2 (**permalink**) 02-06-2008, 06:05 AM

A traditional IRA is fine. As TurboTax points out, you will lower your taxable income and ultimately pay less in taxes up front. You may also lower your taxable income enough to make yourself eligible for other tax deductions or credits.

As an alternative, you may want to consider a Roth IRA instead. You don't get a tax deduction up front, but you will not pay taxes when you withdraw your money at retirement. Many people believe tax rates will be higher in the future, and a Roth would win out if that happens.

Either way, opening an IRA is pretty simple. I would suggest Vanguard, Fidelity, or T. Rowe Price, but there are other firms that will do it as well.

jIM_Ohio · #3 (**permalink**) 02-06-2008, 10:51 AM

I would second the T Rowe Price recomendation- that is who I use. Choose a single mutual fund for each spouse.

Is the IRA deductable for both spouses?

gekkoplus · #4 (**permalink**) 02-06-2008, 07:17 PM

"Is the IRA deductable for both spouses?"

How can I know this? TurboTax states that my investment are deductible upto 2K and wife's upto 4K. I am not sure why I have a lower limit.

Just as an additional info, we are filing our taxes jointly and I am covered under 401K by my employer.

jIM_Ohio · #5 (**permalink**) 02-06-2008, 07:28 PM

if you were covered by a 401k for only half year, makes sense only half of your contribution would be deductable.

spouse makes sense- not covered by employer plan
for spouse with earned income, qualifying for deductable IRA is not easy... to point where I might suggest the 2k go into a Roth if the 2k is not deductable.

disneysteve · #6 (**permalink**) 02-07-2008, 01:20 PM

Quote:

Originally Posted by gekkoplus

I am curious about the process of opening an IRA account. Is it as simple as opening any regular bank account? Can I deposit my money in CDs? Should I prefer one kind of bank over other? (credit union, big name banks, broker etc.)

This wasn't fully answered, though sweeps and Jim touched on it.

You could open an IRA at a bank or credit union, but you shouldn't. Assuming you are both young and have many years until retirement, you don't want to be putting your retirement money in CDs and other low-yielding investments. You want to be putting that money into investments that will grow over time, namely stocks and stock mutual funds. Exactly which funds to choose depends on your overall asset allocation. You mention that you have a 401k plan on your job. How are you investing that money? What other investments do you have, if any? You always need to look at the big picture when opening a new account.

I agree with Jim that you should each choose one fund for the IRA accounts, mainly due to account minimums. Actually, Vanguard's minimum is $3,000 so if you will only be investing $2,000, you can't open your account there. The way around that, though, would be to also make at least $1,000 of your 2008 contribution at the same time if you can afford to do so now.

getrichslow · #7 (**permalink**) 02-09-2008, 05:37 AM

If your company has a 401k match be sure to take advantage of it. If you are at the beginning of your career, are in a low tax bracket and anticipate income growing significantly consider a Roth.

Prior posters are right that you probably shouldn't open an IRA and essentially keep it in cash. However, don't be scared away from checking with banks. Big banks often offer their retirement accounts through affilites and they can provide great IRA options, often with a much larger selection of funds than brokerage firms. The other advantage is that they may let you start the IRA with as little as $1k and give you access to funds with low or no IRA minimums.

Also, if you have a checking account, mortgage, credit, etc. through the bank or affiliate you may be able to bundle services to get perks on all the accounts.

gekkoplus · #8 (**permalink**) 02-10-2008, 08:27 PM

"I agree with Jim that you should each choose one fund for the IRA accounts, mainly due to account minimums"

Can you please explain why only one fund? I have a 401K account with Fidelity and there I get to choose atleast 8-10 funds to invest my money in..

sweeps · #9 (**permalink**) 02-11-2008, 04:02 AM

Quote:

Originally Posted by gekkoplus

Can you please explain why only one fund? I have a 401K account with Fidelity and there I get to choose atleast 8-10 funds to invest my money in..

Because unlike your 401k plan, there is a minimum investment required in the funds for the IRA. $3,000 is a typical minimum investment. So if you wanted to invest in 10 funds, you'd have to put in $30,000.

Also -- just because you can invest in 8-10 funds doesn't mean you should. You may think you're diversifying your portfolio, but you're probably not. Many funds' holdings overlap.

By the way, if you use the Quote button next to someone's post it is much easier for you to use and for us to read.