81 – How to Setup an IRA


Episode Overview:

Ken shifts focus to a tangible action that you can use to grow your Net Worth, by utilizing an Individual Retirement Account. IRAs are tax deferred, meaning as it gains value over time (due to investment) you don’t have to pay taxes on that gain. Ken outlines the features of an IRA and how to utilize it. Most people are excited to set up an IRA but tend to drop the IRA process when they reach the investment phase. Ken talks you through this process in hopes to avoid the feeling of uncertainty.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy day to you. This is Ken Kaufman, and I am thrilled you’re here for episode number 81, How to set up an IRA. If you’re thinking about this, this is probably a good idea. Now, I don’t know all the details about your specific situation, but this can be a very, very smart way to save money for retirement and do it in a way that can be a tax advantage. That’s the benefit of the IRA. I will save for another episode to talk about the traditional IRA versus the Roth IRA, the differences, and why you might wanna consider one versus the other. But the tax advantage I wanna talk about, just every IRA that you could open, the traditional or the Roth, is that all of the earnings go tax-deferred. So, if you were to put $6,000 in, which we’re here in the year 2020, and $6,000 is the maximum amount that you can fund an IRA with each year, and you have to have actual earnings that year, wages or income from self-employment or from somewhere, you’ve got to have at least earnings equivalent to the amount you put in up to the $6,000. And let’s say that you let that money sit in this IRA for 40 years and it compounds growth, you’re a really smart investor and let’s say somehow, it’s become worth $100,000.

Well, along the way, as it was gaining its value, you don’t have to pay any taxes. That is one of the benefits of an IRA. Now, whether or not it’s taxable, when it goes in or when it comes out, that has to do with the Roth and the traditional conversation we’ll have another time. But going through the process, now how do you set one up? The first thing is, is this is always an individual account. In fact, the I in IRA stands for individual. You cannot do a joint account where you sign up with your spouse. It will be in your name and you have to be at least 18 years old to have an IRA in your name. If you have children or minors that are under the age of 18, that you wanna fund an IRA for, first, they’ve got to have earnings at least equivalent to the amount that you’re putting in, if not more, up to the $6,000 limit each year, but you can do what’s called a custodial IRA where you, as a parent, or guardian, or custodian can be the primary owner listed and it’d be for the benefit of your child and then when they turn 18, then it becomes theirs and they take over. So, there is an option, but the person who’s 18 or older that sponsors that, it does sit in the responsibility of it being in their name, wholly and individually until the other individual, the minor, turns age 18.

Another big confusion here is, is people get confused and they say, “Well, I have a CD.” And they think that a CD or a certificate of deposit is an IRA. I wanna be clear, this is just the characterization or the…I shouldn’t say that, not characterization, the title of who owns the account. It’s an individual retirement account in your individual name. You can then go and set up an IRA at almost any financial institution, banks, credit unions, definitely, investment companies, brokerage houses, and so on and so forth. And in fact, there are even what are called self-directed IRAs where you can fund an IRA that’s with a…there’s usually a custodian or a trustee that allows you to take that money and go and put it in alternative investments that will be different than something you’d buy at a normal financial institution like stocks, or bonds, or mutual funds, or ETFs, or CDs, or money markets, or stable value funds, or anything like that. So, just remember that IRA is just how the account’s characterized, and then you can choose to go and invest that money in just about any financial product available.

The biggest barrier that I’ve found people in this process of setting up an IRA is they get stuck at, but now, where do I put the money? So, if I go to a bank or if I go online and…which I would highly recommend. There are a lot of great online places with very low fees. Vanguard, I’m definitely a fan of, Fidelity, I’m a fan of. Right now, a lot of my investments are at M1 Finance because they’ve got this really cool technology that does auto rebalancing and it’s for people who are…they are more on the do-it-yourself side of investing than they are on having help. And I’m happy to be in the technical details of what’s required to engage with M1 Finance, but, you know, that’s a great place and it’s a free platform. Generally speaking, when you…or I should say, the biggest barrier is what to put the money in, where to invest it. And so, some people will just go ahead and put it on money market, or stable value fund, or a checking account, or a savings account even at the bank. And the only reason why I’ll throw this out for you to consider is that could be problematic is that if you’re saving for retirement and you’re young, because when you put money into an IRA, that’s generally the objective, you could be putting yourself in a very bad place if you’re not giving yourself an opportunity for that money to grow as much as possible over time.

Putting $6,000 into an IRA, if it grows at 1% a year for 40 years, versus it grows at 5% every year for 40 years or 8%, or 9%, or 10% depending on how you’ve invested it and what your risk tolerance is, huge difference over the span of those 40 years and it can make a big difference. People feel intimidated by making these decisions about what should I invest in? There are even studies that show in 401(k) plans that employees usually are really motivated, they’ll go in, and they’ll sign up for their 401(k), they’ll get all their information in, and then the last step before you complete is you have to say what mutual fund or what investments within the 401(k) plan parameters do you want your money to be invested in? And that is where probably 80% to 90% of people who are motivated and go in to get themselves signed up online for their company-sponsored 401(k) plan stall out and they never end up signing up. That is a tragedy.

And I have tried to put good content out there. I’m not an expert in terms of, you know, the people that have all these amazing portfolios and plans. I do my own thing. Mostly, we attract do-it-yourselfers to this podcast and these are the types of things we talk about. But if you feel at all intimidated by this, I would tell you a couple of things. First one is, if you’ve got a while for retirement, you really need to consider having at least 50%, if not more, in stocks. And then the rest can be in bond funds, or stable value, or those kinda things. But the more time you have, the more critical it is that you let your money grow. If you put it in a savings account, savings accounts never earn more interest in a year than inflation grows and that’s problematic. That means the value of your money is going down every year because net after inflation, even if you earn some interest, it’s not keeping up with cost of living and the cost of existing and surviving.

So, my suggestion to you, as you’re going through this process, find a great online place or if you need to go to your credit union or bank to set it up, or if you’ve got a stockbroker or a financial advisor, definitely go through them. Those with those professionals in their lives, you can get advice as to where to put it. If you wanna be a do-it-yourselfer, I would give you just two suggestions to consider. And this is me not knowing anything about you and I can’t give you specific advice because one, I’m not licensed to do that, and two, it would be irresponsible if I don’t actually know your unique situation and all the details about it. These would be the two things to consider. The first one would be most institutions that offer IRAs have some type of a retirement date fund. Now, there are some critics of these funds. The nice thing about them is… And the critics would say, “Well, if you invested in some of these things or tilted your portfolio more to this or this, you can get better returns and it’s too weighted toward bonds, or it’s too weighted toward growth versus value, or…” There are plenty of arguments around all that.

The key thing about a retirement day fund is, is you put your fund in…or you put your money into a mutual fund or an ETF that mirrors what a portfolio hypothetically should do in terms of becoming less risky the closer you get to your retirement age. And it does make the assumption you’re retiring at 65, but you can go in there and find one of those funds and you can put your money there and let it start working for you and it’ll go up and down. They’re stocks. There’s nothing…you know, there’s no guarantees around it, but I’d ask you to consider doing that just to get yourself started before you can go and get some more professional advice or get yourself more educated if you wanna be a do-it-yourselfer, and then you can start to move your money from that investment into other places. And the cool thing, like I said, you can sell and buy. You can sell out of whatever you start with and then buy something else. And there’s no taxation, there’s no capital gains, there’s no short-term or long-term gains, and it allows you the flexibility because everything’s tax-deferred until you actually pull the money out of the account.

So, that is my number one recommendation is make sure you’re prepared to break through that barrier of what should I invest in or where should I put it? You know, go get yourself advice or find a retirement date fund that you can put it in within, you know, what your financial institution offers, and then if you’re really dedicated to wanting to be a do-it-yourselfer but you haven’t had time or you want to, you know, digest more materials and learn more about stocks, and bonds, and the whole investment world, my recommendation would just be, get it into one of those target-date funds for now and then you can start to learn. And there’s so many great resources to learn about how to be an investor and how to think about the market.

So that’s it, how to set up an IRA, really easy. Account registrations are clear now…I’ve made that clear. And just everything else is easy. Your social security number, all that information to get the accounts set up, and then just make sure you’re ready to make that investment decision and don’t stall out. Go for it. Get your money in there and get that working for you. Many, many thanks to you for joining today. This is a wrap for episode 81. Happy day.

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About the Podcast

Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.


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