What type of account is right for me?
This will depend on not only your current financial needs but on your financial goals and retirement planning. The first thing to consider is if you are looking to save for retirement or a different goal such as growing wealth or purchasing a house in 5 – 10 years time. Typically, you should ensure you have a retirement plan in place before focusing on other goals, and IRAs, which provide tax benefits, are a great way to save up for your future.
If you are interested in saving for retirement and you have already maximized your employer 401k, then it is time to consider an IRA. With OpenInvest there are three types of IRAs; the Traditional, the Roth, and the SEP. For almost everyone, the choice is between a Traditional IRA and a Roth IRA. A traditional IRA is tax-advantaged when you contribute to the account, meaning you don’t pay taxes on your contributions but you will pay taxes on the withdrawals you make during retirement. You are also required to start making withdrawals once you reach a certain age. A Roth IRA is just the opposite: you will pay taxes on the money you contribute in the tax year you contribute it, but you will not pay taxes on the money you withdraw during retirement, and you are not required to make withdrawals at any point. The primary factor you should consider when deciding between these types of IRAs is if you anticipate a higher tax rate now or when you retire. Consider the work you are currently doing. Are you just getting started in your career or are you at already at a high level in your earning potential? Consider also that US tax structure and if it is currently at a high or low individual tax burden. Both of these as well as other issues will influence if you should pay taxes now (Roth IRA) or later (Traditional IRA).
The third option for an IRA is a SEP which is for self-employed individuals and small businesses that want to create a simplified employee pension plan. SEP-IRA funds are taxed at ordinary income tax rates when qualified withdrawals are taken after age 59 1/2 (as for traditional IRAs).Contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of: 25% of the employee’s compensation, or $55,000 for 2018 ($54,000 for 2017).
As tax implications of retirement are complex, to say the least, many users choose to hold both a traditional and a Roth IRA, and you can seamlessly manage both through OpenInvest. While you can do your own research and make an educated decision on what kind of account to open, it is always a good idea to consult a tax specialist or financial advisor who acts as a fiduciary and can help you make decisions in your best interest.
If you are investing to grow your wealth or for a nearer term goal than retirement we recommend that you open an individual investment account. This type of account, while not tax-advantaged like a retirement account, is an excellent option for those that want to invest with their values and grow their funds at a better rate than a savings account or CD.
There are a few other options when considering what type of OpenInvest accounts you may want to open, and they include; a custodial investment account set up for a child’s future, a joint account for spouses or partners which can be a taxable or IRA, and an LLC account which is an investment account ‘owned’ by a company. When deciding which account types are right for you, your family, and potentially your business, it is important to consider your financial outlook now and in the future. If you have any questions, please reach out to us for support.