The 10K IRA – New Year’s Resolution: Start a Retirement Plan

The 10K IRA blog series is one of my New Year’s resolutions. I work in the Business Development Department at New Direction IRA, am in my mid-twenties, and have discovered a lot of my friends have not started any sort of retirement plan. Over the upcoming months, I will be offering ideas for the young investor to consider when it comes to retirement investing.

With pensions being a thing of the past, it is often up to the employee to take control of her or his own retirement. If you are anything like me, opening a retirement account is about as exciting as cleaning out the garage, but it’s a lot easier than deciding if you should keep or throw out your VHS tapes. Successful investing now can make an enormous difference for our financial future. Getting started is the most important thing, even if you start with small steps.

Here are some things to know about getting the account open:

1. There is usually a processing fee to open an account.
2. You will have to prove your identity. Sometimes you can answer questions online (i.e. driver’s license number), other times you will have to send in a copy of identification.
3. You will need to know what type of account to open. Traditional IRAs and Roth IRAs are the most popular types.
4. You usually need to fund your account within a certain time period. There are 3 ways to fund an account (contribution, transfer and rollover). This can be confusing; so, I have explained these options below. And remember, you can decide how to fund your account after you open it.
5. You will need at least one beneficiary. This is a person designated as the recipient of funds when you pass away. Of course, you can change this over the years as your life changes.

Once you submit your application, it will take a couple of business days to open the account. After the IRA is opened, you can fund it. Don’t wait too long or your account will close (it’s like a bank account with no money in it).

Here are ways you can fund the account:

1. Contribution – Being new to the professional working world, this was my only option. You can write a contribution check or have an allotted amount of money go from your paycheck to your new IRA. Not having the money to spend is easier than forking it over after it’s been in your possession. Your paycheck will be lower, but the money going to your IRA is tax deductable, which is a good thing.
2. Transfer – If you have had an IRA at an old job, you can move it over with a transfer. All you need to do is request a transfer form from your new IRA provider, fill it out and send it back in. If your funds are tied up in an investment, you will need to call to liquate them and the new IRA provider will handle the rest. Transfers usually take 7-14 business days, depending on where your funds are currently held.
3. Rollover – A rollover is necessary to move a Qualified Plan (i.e. 401k or 403b) to an IRA, and it’s an option to move funds from one IRA to another. To move funds via a rollover, you need to contact the company that currently holds the Qualified Plan and fill out their forms. The sending custodian will file a 1099R to report the distribution. If funds are deposited in your new IRA within 60 days of the distribution, there will be no IRS tax or penalty or consequences. While there is IRA reporting with rollover, they are usually faster than transfers.

There is not a lot more to it than that; now you know how to open and fund a retirement plan. Hopefully it is not as painful as you once thought. And if you are looking to put something off, go with cleaning out the garage…it’s winter and the garage clutter can’t earn tax-benefitted money for you like a retirement plan can.