Doing My Best: To Start an IRA in 48 Hours
Updated: Jun 15, 2019
Hello! Happy March 1st to my Facebook friends and distant relatives. A few days ago, when I sat down to write this piece, I realized that I had absolutely nothing to show for this month. Nada! Zip! Squat. What was I supposed to do, write about my trip to the dentist? Yes, that'll definitely go viral.
With 48 hours to spare, I wondered, Hey, how long does it take to open an IRA? It's my day off, I have time.
You did not have time, Jay. It'd be pretty irresponsible to make a lifelong financial commitment just to beat a deadline. So, 48 hours isn't enough time to start a retirement fund, but it is certainly enough time to Google everything you should know before pulling the trigger.
Generally speaking, you can't talk about retirement without bringing up the term, 401(k). Not this time though, today we're just going to glaze over it. Since I'm a freelancer, I don't get to enjoy the benefits of full-time employment, which means I will be opening an Individual Retirement Account (IRA) instead. From what I understand, I won't be earning as much as I could with a good 401(k) plan, but I'll still be able to gather a respectable amount of wealth. Even if you already have a full-time job, it's in your best interest to open an IRA as well. Not all 401(k)s are made equal, so in some cases, you can earn more money through an IRA than through your employer's plan. Does the company offer to "match" your contributions to your 401(k)? If so, then don't sweat, you have it made. Opening an IRA will increase your earning potential, but that's all the advice I can offer on the subject. However, I did find this handy article, which explains the advantages of IRAs and 401(k)s in more detail.
Good college students cite their sources, that's all I'm saying.
So, what is an IRA and why should you get one?
From what I understand, an IRA functions similar to a 401(k), but on a smaller scale. It allows you to make investments that will hopefully garner a decent amount of money over a long period of time. There is a cap on how much you can contribute to your fund, which curbs your earning potential, but also offers a more gentle introduction to investing. (This isn't The Wolf of Wall Street, we just want a comfy retirement.) As of 2019, the limit is $6,000 per year, or $7,000 for individuals over 50.
Why should you get one? Personally, I think IRAs are pretty dope. They function as your personal account, so you're not beholden to a specific employer, or limited to the investment options in their package. IRAs also offer a lot of additional benefits (which we'll discuss later), but the big one is that you can buy a house! First-time home-buyers are allowed to withdraw up to $10,000 from their savings, penalty-free, to help cover those expenses. How nice is that? Generally speaking, you're not allowed to touch your earnings until you reach a certain age, but this is one of the few exceptions. For someone who has bounced between apartments for the past 5 years, the prospect of one day owning a house - a real, mother-f*cking house! - is very exciting.
I'm sold, how do I open one?
I have no idea! I did not get that far in my 48 hours of research, but I did find this article, which lists all the major IRA providers, along with a handy pros-and-cons list for each of them. Call me naive, but I was hoping that there would be one central, federally-run IRA office, and the thought of shifting through all these options felt very daunting . . . so I gave up.
I imagine I'll have more information on my next update, when I'll hopefully have my own IRA account, but for now, here's what I have to share.
There are two types of IRAs, and I'll save you a Google search and tell you which one is better. If you're still in the early stages of your career, I suggest opening a Roth IRA. From what I understand, a Roth account will save you more money in the long run. See, there's no way to avoid it: you will owe taxes on your IRA contributions, it's just a matter of when you want to pay them. It's more cost-effective to choose a Roth account and pay those taxes now, while you're still in a lower income bracket, versus later, when you're older and more successful. Does that make sense?
There are certain income-based restrictions on Roth IRAs. Simply put, if you're too rich, you can't sit with us. As of 2019, Roth IRAs have a hard salary cap of $137,000 for single tax-filers, although additional restrictions apply, starting at $122,000. Not to make assumptions, but I don't think any of us need to worry about it.
This brings us to traditional IRAs, which are open to all hard-working individuals, regardless of income status, but certain limitations apply to those who already have a 401(k). Traditional IRAs will save you more money in the short term, because you don't have to pay taxes until after you reach retiring age. Since all your contributions are tax-deductible, you'll also have a lower AGI (adjusted gross income) for that year, which may help you qualify for other tax-incentives, like child tax credit or deductions on student loan interest. Again, traditional IRAs will save you money for now, but one day, you'll want to take advantage of that hard-earned wealth, and once you withdraw, Uncle Sam will be calling to collect. Also, don't think you can beat the system and just leave your fund untouched indefinitely. Once you hit 70 (and a half), you're required to make regular withdrawals from your account, and pay taxes on them. (Roth IRAs don't have mandatory withdrawals, and in any case, you already paid your dues way back in your 20s!)
Here, I made a chart!
Phew! That was quite the information dump, wasn't it? Did you learn anything new? Does your brain hurt a little? Mine does. But get used to it, because we're going to tackle a lot more of these heavy hitting topics in the coming months.
The next time we meet, hopefully I will have more wisdom to impart, specifically in regards to the actual process of opening an IRA, and the merits of the various providers. And hopefully, I'll still have an audience willing to listen to long explanations about these dense, but very important, adult topics.
For now, I'm going to take a long nap and dream about my future $10,000 house. Thank you to everyone who stuck around to the very end of this piece. I hope that one day, you too will retire happily, with enough cash to make it rain!