How to Start a Retirement Plan

Saving and investing for your retirement is essential to ensure that you enjoy your golden years in comfort. However, unless your employer offers a 401(k) or other company-sponsored pension program, it’s up to you to start a retirement plan. You will need to decide which type of plan and investment strategies best fit your needs and then follow IRS rules to take advantage of available tax benefits. That’s the real work involved to start a retirement plan. Opening the account usually requires no more than filling out a form and making an initial deposit.

Familiarize yourself with the different types of retirement plans and choose the best one for you. Retirement plans set up by individuals are called Individual Retirement Accounts (IRAs). There are two basic types, the traditional and the Roth. A traditional IRA allows you to take an up-front tax deduction for your contributions. In a Roth IRA, you don’t get to deduct your contributions to the retirement plan, but when you withdraw funds after retirement, everything (contributions and earnings) is entirely tax free. Two other types of IRA, SEP and SIMPLE, follow the rules for traditional IRAs but are provided through your employer, unless you are self-employed.

Determine your eligibility. As long as you have earned income you can open a Roth IRA. To start a SEP IRA you must be at least 21 and worked for your employer 3 of the last 5 years. For a traditional IRA you must be less than 70 1/2 years old. You can contribute up to $5,000 per year ($6,000 if you’re past 50) to an IRA, but must leave the money in the account until age 59 1/2 (with a few exceptions). The contribution limits for SEP and SIMPLE IRAs are considerably higher—25 percent of your income up to $49,000 per year (as of 2009).

Choose the type of investment strategy that best fits your requirements. Most people start a retirement account with a bank, mutual fund or brokerage firm. For inexperienced investors or someone who has limited time to research stocks and other securities, banks and mutual funds are good choices. An IRA at a bank usually has low fees and can be as simple as purchasing CDs to be held in the account. Bank IRAs are safe because they are insured by the FDIC. A mutual fund retirement plan works in a similar fashion, except the fund invests in stocks or bonds and usually provides a better return on your investment, but with greater risk

Decide if you want a self-directed IRA. You should have an account with a brokerage firm if you wish to manage your own IRA investments. Potentially this is the most profitable form of retirement account. However, you take responsibility for complying with IRS regulations that govern your IRA, as well as for researching and picking your own investments.

Start your retirement plan. Many banks, mutual funds and brokerage firms provide enrollment forms online. You must provide your personal information, a valid state-issued or military ID and the name of your employer. To open the retirement account, you have to make a minimum initial deposit. For mutual funds and brokerage firms this is usually $1,000, but banks often let you start a retirement plan for as little as $100. Keep in mind that once you contribute money to an IRA, it must stay there until you are 59 1/2. There are some exceptions, such as purchasing a first home or if you become disabled. Otherwise you will incur a hefty penalty from the IRS if you withdraw funds prematurely.