An IRA, or Individual Retirement Account, is a tax-advantaged retirement savings vehicle. Holders of an IRA retirement account may contribute a set amount of money to it each year -- the maximum yearly contribution for 2008 is the lesser of 100% of earned income or $5000 for individuals under the age of 50. For individuals over the age of 50, the maximum contribution to an IRA is the lesser of 100% of earned income or $6000.
Many types of IRAs exist, and the type that best suits an individual is dependent on that individual's age and how much money is needed to retire.
Traditional IRA - contributions to a Traditional IRA are often tax-deductible, meaning that the money that is contributed is done so before tax is deducted. Earnings and transactions on assets held within a Traditional IRA are not taxed, and the money that is withdrawn from a Traditional IRA at retirement is taxed as income.
Roth IRA - contributions to a Roth IRA are done so after tax has been deducted, which is the principal difference between a Roth IRA and a Traditional IRA. Earnings and transaction on assets within a Roth IRA are not taxed. Money that is withdrawn from a Roth IRA at retirement is not taxed (since it was taxed when it was contributed).
Self-Directed IRA - the owners of these IRAs are permitted to make investments on behalf of the plan. A Self-Directed IRA allows the holder to make investments, using money in the IRA account, in a broad selection of investment vehicles, whereas most other IRA types are restricted to a few mainstream investments.
Only cash can be contributed to an IRA retirement account. Once that cash is held by the IRA, however, it can be used to purchase most securities and a few forms of non-security financial instruments.
The IRS permits the custodian of an IRA -- that is, the entity that the IRA is held through, such as a discount broker -- to impose more restrictions on the types of assets that may be held in an IRA than tax code imposes. Many custodians do not allow real estate to be held within IRAs with the exception of investment in a REIT (real estate investment trust) fund. Many custodians limit the investments which they will allow in an IRA to stocks, bonds, and mutual funds.
Self-Directed IRAs do allow for the purchase of non-security investments.
Find a discount broker with a favorable fee structure. Remember that many discount brokers charge a yearly fee to maintain your IRA retirement account. Even if a discount broker charges only $30 per year, this yearly charge could amount to thousands of dollars by the time you are ready to retire.
Shop around and find a broker with low yearly administration fees and low trading commissions. A trading commission is the amount that a broker charges to make a trade on your behalf.
For instance, if you wanted to invest $5000 in your IRA by buying shares of a company which cost $50, and your broker's trading commission was $10 per trade, you would not be able to buy 100 shares -- you would only be able to buy 99 at $4450 because of the $10 commission. You would therefore have $40 in cash left to invest in your IRA that year.
This depends on your age and lifestyle demands. Retirement savings are a personal decision, and how much money you need to save for retirement is dependent on your personal preferences. Using a retirement calculator can help you determine how much money you should invest in your IRA each year to hit your financial benchmarks for retirement. Remember that saving for retirement is not limited to IRA accounts.