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Total IRA newbies!

My wife and I each need to open an IRA before mid April to count for tax year 2016. I need to do this to offset some income I took from an inherited IRA. But I've never opened an IRA myself before, and don't know where to start.

Relevant facts:

  • This money had been in a guaranteed 3% annuity before I (perhaps unwisely) took out a $10k distribution. I'd like to try to at least attempt to match at least that return, if possible.
  • We are rather risk averse people, but I'd like to change that, because at some level I realize that it's irrational. Ideally, I think, I'd like to invest most of our savings into the market instead of having it rotting as cash. This IRA might be a good first step into overcoming our fears.
  • I tend to put way too much thinking into every last thing I do and need to back off that slightly. We also have a lot of other stuff on our plate this season and I'd like to make this process fairly straightforward, though I'd be willing to put whatever necessary due diligence in I should.
  • It's very important I get this IRA opened on time, because otherwise I will face a sizable tax penalty (due to tax credit for ACA stuff). So how long does it take to set up an IRA for each of us?
  • It's not clear to me what kind of IRA it should be: regular? Roth?
  • We're both 46, no kids, no debt, some savings.

So, can you suggest any advice for how we might go about researching IRA options, picking ones, and executing this reasonably?

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    Since you are getting tax credits for ACA stuff, you might not be employed or are employed in a job that has no employer-provided health insurance coverage. If so, you need to make sure that you had compensation (earned income such as wages, self-employment income, commissions from sales, etc) during 2016 that is at least as large as the proposed IRA contributions. Having the money (e.g. the distribution from the Inherited IRA) to make the contribution is not the issue; being able to show the IRS that you have sufficient earned income to cover the IRA contribution is. – Dilip Sarwate Mar 13 '17 at 11:58
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First, a Roth is funded with post tax money. The Roth IRA deposit will not offset any tax obligation you might have.

The IRA is not an investment, it's an account with a specific set of tax rules that apply to it. If you don't have a brokerage account, I'd suggest you consider a broker that has an office nearby. Schwab, Fidelity, Vanguard are 3 that I happen to have relationships with.

Once the funds are deposited, you need to choose how to invest for the long term. The fact that I'd choose the lowest cost S&P ETF or mutual fund doesn't mean that's the ideal investment for you. You need to continue to do research to find the exact investment that matches your risk profile. By way of example, up until a few years ago, my wife and I were nearly 100% invested in stocks, mostly the S&P 500. When we retired, four years ago, I shifted a bit to be more conservative, closer to 80% stock 20% cash.

  • Joe: I was taking a "risk assessment" on ETrade, and their take was that your 80/20 split was "aggressive" (the second-most volatile). Their "conservative" splits had way less invested in stocks. Do you consider your position "aggressive" ? Real question; I tend to (apparently) prefer a "very aggressive" split. – Peter K. Mar 13 '17 at 0:06
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    I think that's true. I am 54. The 100-age seems too conservative. Since I am in retirement mode, 20% represents 5 years of spending. A crash tomorrow gives me 5 years to recover. It would take a long market downturn to give me grief. Especially since my wife is 8 years from full (max) social security benefits. Odds are, as I approach 70, a 90/10 mix (yes, a more aggressive mix) would make more sense as our annual withdrawals will drop to 2%. – JoeTaxpayer Mar 13 '17 at 0:32
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If you want to 'offset' current (2016) income, only deductible contribution to a traditional IRA does that. You can make nondeductible contributions to a trad IRA, and there are cases where that makes sense for the future and cases where it doesn't, but it doesn't give you a deduction now. Similarly a Roth IRA has possible advantages and disadvantages, but it does not have a deduction now. Currently he maximum is $5500 per person ($6500 if over age 50, but you aren't) which with two accounts (barely) covers your $10k.

To be eligible to make this deductible traditional contribution, you must

  • have earned income (employment or self-employment, but NOT the distribution from another IRA) at least the amount you want to contribute

  • NOT have combined income (specifically MAGI, Modified Adjusted Gross Income) exceeding the phaseout limit (starts at $96,000 for married-joint) IF you were covered during the year (either you or your spouse) by an employer retirement plan (look at box 13 on your W-2's).

With whom. Pretty much any bank, brokerage, or mutual fund family can handle IRAs. (To be technical, the bank's holding company will have an investment arm -- to you it will usually look like one operation with one name and logo, one office, one customer service department, one website etc, but the investment part must be legally separate from the insured banking part so you may notice a different name on your legal and tax forms.)

If you are satisified with the custodian of the inherited IRA you already have, you might just stay with them -- they may not need as much paperwork, you don't need to meet and get comfortable with new people, you don't need to learn a new website. But if they sold you an annuity at your age -- as opposed to you inheriting an already annuitized IRA -- I'd want a lot of details before trusting they are acting in your best interests; most annuities sold to IRA holders are poor deals.

In what. Since you want only moderate risk at least to start, and also since you are starting with a relatively small amount where minimum investments, expenses and fees can make more of an impact on your results, I would go with one or a few broad (= lower risk) index (= lower cost) fund(s). Every major fund familly also offers at least a few 'balanced' funds which give you a mixture of stocks and bonds, and sometimes some 'alternatives', in one fund. Remember this is not committing you forever; any reasonable custodian will allow you to move or spread to more-adventurous (but not wild and crazy) investments, which may be better for you in future years when you have some more money in the account and some more time to ponder your goals and options and comfort level.

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As other people have indicated, traditional IRAs are tax deductable for a particular year. Please note, though, that traditional IRAs are tax deferred (not tax-free) accounts, meaning that you'll have to pay taxes on any money you take out later regardless of why you're making the withdrawal. (A lot of people mistakenly call them tax free, which they're not).

There is no such thing as a "tax-free" retirement account. Really, in terms of Roth vs. Traditional IRAs, it's "pay now or pay later."

With the exception of special circumstances like this, I recommend investing exclusively in Roth IRAs for money that you expect to grow much (or that you expect to produce substantial income over time).

Just to add a few thoughts on what to actually invest in once you open your IRA, I strongly agree with the advice that you invest mostly in low-cost mutual funds or index funds.

The advantage of an open-ended mutual fund is that it's easier to purchase them in odd increments and you may be able to avoid at least some purchase fees, whereas with an ETF you have to buy in multiples of that day's asking price. For example, if you were investing $500 and the ETF costs $200 per share, you could only purchase 2 shares, leaving $100 uninvested (minus whatever fee your broker charged for the purchase).

The advantage of an ETF is that it's easy to buy or sell quickly. Usually, when you add money to a mutual fund, it'll take a few days for it to hit your account, and when you want to sell it'll similarly take a few days for you to get your money; when I buy an ETF the transaction can occur almost instantly. The fees can also be lower (if the ETF is just a passive index fund). Also, there's a risk with open-ended mutual funds that if too many people pull money out at once the managers could be forced to sell stocks at an unfavorable price.

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