If you have recently started researching opening an IRA you may be shocked at how confusing it can all be. Many companies try to fool you into believing that they are the best companies because of outstanding customer service or even going so far as to put a little free money into the account you are going to open. You need to look past any type of gimmicks used and focus on a few simple fundamental principles which should be embraced by the companies are going to trust your IRA money with.
Investment advice is one thing you should keep in mind when choosing a company for your IRA. If you understand retirement investing then your choice is quite simple, go with the low cost leaders. This will be discount brokers for stock choices or low-cost mutual fund companies. If, on the other hand, your eyes glaze over when the word “investing” is even mentioned then you may want to go with a company which can help you with your investment choices.
You will pay extra to invest with these full-service companies; however, many people are completely fine paying a little extra to not have to deal with the confusion of investing for retirement. These companies can also tell you if a Roth or Traditional IRA is better suited for your situation. Take a close look at a Roth if you qualify because you will never have to pay taxes on the money in retirement. The best Roth IRA companies, along with regular contributions to the account, can have you living a very comfortably retirement.
Next, you need to decide whether you are comfortable using individual bonds and stocks for your IRA or if mutual funds may be a better choice. Discount stockbrokers are almost always the best choice for individuals building their own stock and bond portfolios because of low transaction costs. On the other hand, mutual funds are a much better choice for individuals building a well diversified portfolio because of the broad range of asset classes available and the instant diversification you get by purchasing a mutual fund instead of individual stocks.
The last item you need to keep in mind when looking for a good IRA company are fees. Fee structures can be all over the place and vary from company to company. Discount stockbrokers may have an annual charge for an account in addition to the fees charged per trade. Some will also have minimum investment requirements. For mutual fund companies one of the biggest fees associated with an IRA is the management fee.
The average fee for a mutual fund is 1.5%. That means your investment must earn one and a half percent per year just to break even. This is why it is very important to take a look at index funds and try to build portfolio of these when possible. Many index fund management fees are closer to an average of .2%. building a portfolio of index funds can result in great returns along with low cost. This can often result in a better rate of return than using actively managed mutual funds.