How to Open an IRA for Tax Savings Purposes

by Duncan Jenkins ; Updated July 27, 2017
IRAs can supplement other retirement plans.

Individual retirement accounts (IRAs) are investment tools for retirement savings. These accounts are normally started privately and are unaffiliated with your employer. You can open an IRA to help supplement your 401k or pension. Opening one of these accounts is relatively simple, but you'll need to make a few important decisions prior to depositing that initial sum.

Step 1

Decide what kind of tax savings you are looking for: long- or short-term returns. There are two types of IRAs, Roth and traditional, and each plan offers different tax benefits.

Step 2

Choose a traditional IRA if you make well over six figures in income and you need short-term tax savings. Traditional IRAs let you deduct your contributions to the fund each year on your taxes. This may dramatically reduce your total tax liability when you file (thereby increasing your refund).

Step 3

Choose a Roth IRA if you want long-term tax savings. You cannot deduct your contributions on your taxes, but you can make tax-free withdrawals--both before and after you turn 70-1/2. Roth IRAs are most closely related to 401k plans.

Step 4

Choose the investment strategy once you've selected an IRA. For amateur investors, choose mutual funds. These are low-risk, low-return investments. While you won't make dramatic returns, your money will be relatively safe. Savvy investors should request a prospectus from all prospective fund managers. This will help guide investment selections.

Step 5

Choose a company to handle your IRA. You can go through a bank, a finance company or an investment bank. Make sure to research all potential holding firms at the Better Business Bureau (Bbb.org). Also check the company's credit rating and performance at Moody's or Standard & Poor's, both of which are corporate credit rating agencies.

Step 6

Make your initial deposit once you've decided on the type of IRA, the institution and the investment strategy. Monitor your IRA at least quarterly.

About the Author

Based in Eugene, Ore., Duncan Jenkins has been writing finance-related articles since 2008. His specialties include personal finance advice, mortgage/equity loans and credit management. Jenkins obtained his bachelor's degree in English from Clark University.

Photo Credits

  • Investment image by Svitlana Boldyryeva from Fotolia.com