In this article
How To Get Started With A Traditional IRA
A traditional individual retirement account (IRA) is a specific kind of investment account that saves you money every tax year during your working years. You only pay taxes on your investment gains when you make withdrawals in retirement.
The IRS has announced that the maximum amount for tax years 2020 and 2021 is $6,000 a year.
If you’re a 50 years or older solo-preneur, you can contribute another $1,000 as a “catch up” contribution.
You cannot contribute more than 100 percent of your employment income. In other words, maximum contributions may not exceed earned income.
For 2020 and later, there is no age limit on making regular contributions to a traditional IRA.
How to Set Up a Traditional IRA
You can set up your traditional IRA at almost any bank, insurance company, brokerage firm or other financial institution. As a digital creative you’d likely be able to navigate the modern account opening process, so we’re here to share tips.
Before you choose where to open your traditional IRA, ask yourself if you are a hands-on or hands-off type of investor. Consider a robo-advisor if you would like an automated way to manage your investment and an online broker if you want to pick and manage your investments.
Just like other investments, there are trading fees, and they vary vastly. Consider the fees and costs attached when picking a traditional IRA provider. While the IRS does not require a minimum amount to open a traditional IRA, some providers require account minimums. Go for a provider with a low or $0 minimum if you are just starting out.
You should also consider the options the provider offers for your investment. Your IRA money can be invested in bonds, individual stocks, mutual funds, ETFs, and many other asset types.
Ongoing education and support is another factor to consider.
Steps to Open an Account
The deadline to open an account and make contributions is the tax filing deadline. This means that you can contribute until 15th April 2021 to a traditional IRA for the tax year 2020.
- Head to the provider’s site and fill in some personal details such as date of birth, contact info, Social Security number and employment info.
- Fund your traditional IRA. You can rollover money directly from your previous retirement account electronically or make a contribution.
- Review the investment options and select the ones that are right for you.
Use our retirement calculator to view the tax amount you can avoid with a traditional IRA contribution.
Popular Financial Institutions to Consider
Generally speaking, most major banking/lending institutions have this retirement option. If you’re already satisfied with the banking institution that you use, it’s worth checking if they offer a Traditional IRA. This way you can keep everything under one roof. However, if you’re looking for a few other places to get started we’ve highlighted a few of the most popular below:
| Company | Fees | Investment Options | Unique Features |
|---|---|---|---|
| TD Ameritrade | No account fees, no minimum to open an account, and no commission fees on trades | ETFs, mutual funds stocks, options, bonds and CDs | Face-to-face customer support at any of their brick-and-mortar branches nationwide |
| Wealthfront | No minimum to open an account, and a 0.25% fee on portfolios over $10,000 | Stocks, bonds, real estate | Simple, and tax-efficient transfer of investments |
| SoFi | No account fees and no minimum to open an account | Crypto, stocks, bonds, ETFs | Adjustment of stocks and bond funds on a quarterly basis |
| Betterment | No minimum to open an account, and a 0.25% management fee | Stocks, bonds | Designs fully-automated portfolios based on your preferred allocation |
Pros and Cons of a Traditional IRA
| Pros | Cons |
|---|---|
| There are no income restrictions to opening a traditional IRA. | You have to start withdrawing money by 1st April of the year after you turn 72. |
| Reduces your taxable income for the year. You can still make contributions to a traditional IRA even if you participate in another retirement plan through your employer or business. | If you have a workplace retirement account already, the tax deduction for contributions can phase out 1. |
| You only pay taxes when you take a distribution in retirement. | You may be hit with a 10 percent early withdrawal penalty if you pull money out before age 59½. Though there are exceptions |
| No age limit on contributions, thanks to the SECURE Act passed in 2019! |
Summary
As you can see, getting started with a traditional IRA takes just a few steps. A traditional IRA is the best retirement account for you if you anticipate your tax rate to be less in retirement than it is now.
However old you are, the time to start saving for retirement is now! Many years from now, you will thank your younger self for taking the initiative to make the right investment decisions.
A little help never hurt anyone. A financial advisor can walk you through your investment options and help you build a traditional IRA portfolio specific to your needs.
- There’s a $65,000 modified adjustable income applied to those filing status as single or head of household. More specific limits by the IRS. ↑
It's not easy to get started as a freelancer, and our aim is to help all freelancers build a retirement plan. If you’re interested in reading more, please subscribe below to get new articles & actionable tips on how to stop overpaying taxes and start building financial security!
