When I retire I want to set up on a beach somewhere and spend the rest of my time sipping Mai Tais while a handsome young gentleman massages my feet (realistic, I know). But whatever your dreams for the future entail, learning how to get an IRA at 25 is not a bad idea. “IRA? What the heck is that?” you say, as you click out of this tab and over to another article that doesn’t involve banking logistics. I'm positive that not a single one of your fantasies for the future contain the words “Individual Retirement Account” or “long-term financial planning.” But they should! Unless I win the lottery or have a generous estranged uncle somewhere, my beach dreams with young Javier (or any otherwise sexily-named man) are over! Goodbye peaceful sun-drenched retirement. Hello… more work?
To paraphrase Britney Spears, if you want to “live fancy” she suggests that you “better work b**ch.” And I’m saying much the same thing (while wearing slightly less bedazzled latex). When you get your first job, and have some money finally coming in after years of schooling and internships, it’s time to think about savings. If you start investing smart at 25, by 55 you will have quite the chunk of change (and can join me on that beach!). How do you do this? Excellent question. Here’s what you need to know in order to make your money work in a tax-advantaged IRA.
Step 1: Commit to Saving
I know you've probably heard old people at cocktail parties talk about "diversifying your portfolio" and then subtly ask "Do you think my yacht is too big?" Starting an IRA can be part of that diversity. I used to brush off that advice because usually all my savings goes in a shoebox in the back of my closet. But then my money doesn't grow, it just collects dust. Committing to putting that money in a place where you can't touch it for a long time is hard. However, once you do, that nest egg will accrue interest, and that is free money, my friend.
"But I don't have any money to save!" You might exclaim as you dramatically collapse into a chaise lounge. To start an IRA, depending on the institution you choose, often there is no minimum dollar amount, and some mutual fund companies will let you start the account for 50 smackeroos per month. It might mean one less craft IPA at your local watering hole every week, but that might do you good (you can just drink at home — it's cheaper!).
Step 2: Call Your Chosen Money Handler
You can set up an IRA through many financial institutions such as a bank, brokerage firm, insurance company — the list goes on. If you have a job that is contributing to your 401k, you can talk to the institution that is in charge of that part of your retirement plan. They are usually handled by brokerage or mutual fund companies. For example, Charles Schwab is a brokerage firm, and Fidelity and Vanguard are mutual fund companies. If you don't have a 401k or you are a freelancer, it might be easier to go through the bank that handles your other checking and savings accounts. Request that a financial advisor walk you through the different kind of IRAs and advise on which might be best for you. There are three main types of IRAs: the Traditional, Roth, and Rollover. Each differs in terms of when you choose to pay taxes on the money that goes into the IRA, and where the money is coming from, and each has its own advantages. Be sure to ask the advisor if there are any fees involved, and how easy it will be to make your investments.
Step 3: Success!
The kind of institution you choose to set up your IRA will determine the investments you make. Whether you want your money investing in mutual funds, CDs, or annuities is part of the choice of who you want investing it. Either way, you save for retirement with tax-free growth or on a tax-deferred basis. Yum! And remember, you won't be able to touch your money without penalty until you are 59 and a half years old. But that's OK, because delayed gratification makes everything better (Just ask Sting and his wife).
Now, if only I could find that shoe box...