The Tip Jar: A beginner's guide to setting up and saving into an IRA

Want to get an IRA for retirement but the prospect is too daunting? Check out this guide.

Retirement may be decades away and the idea of saving for it when you're in your 20s seems like the last thing you want to be doing, but hear me out.

If you want a chance of retiring comfortably and at a reasonable age, say, 60 or 65, then it really does behoove you (great word, I stole it from Dawson's Creek) to get started ASAP, whether through an employer-backed 401(k), an Independent Retirement Account (IRA), or both.

Today, The Tip Jar is looking at IRAs, and has enlisted the help of Plymouth-based certified financial adviser Phillip Christenson, of Phillip James Financial, to tell you what you need to know.

IRAs: The basics

There are two main kinds of IRA, and you can currently contribute up to a maximum of $5,500 every year into them. Here's how they work:

Traditional IRA: Contributions to this kind of IRA are BEFORE TAX, and when you come to withdraw it in retirement is when you pay tax.

Roth IRA: Your contributions to this kind of IRA are AFTER TAX, meaning when you come to withdraw it you don't have to pay any tax on it. However, you can only qualify for a Roth IRA in 2017 if you earn less than $133,000 if you're a single tax filer, and $196,000 if you're a married filer.

In both of these IRAs, any investment growth is tax-free.

Some benefits from IRAs you don't get from 401(k)s

If your employer offers a 401(k) then you should probably take them up on that offer before taking out an IRA, because employers generally match the money you save up to a certain percentage, which is effectively free money on top of your salary.

But Kiplinger notes that IRAs tend to have more flexibility than a 401(k) when it comes to investing, opening up a huge array of company stocks, mutual funds, bonds and even real estate options to put your money in.

Early withdrawals from 401(k)s tend to come with a 10 percent penalty, but you can avoid penalties using IRAs in certain circumstances, such as paying for your first home or your kids' college tuition. A full list of penalty-free IRA withdrawals can be found here via Investopedia.

Motley Fool notes that IRAs also tend to have lower annual costs than 401(k) plans.

Picking your IRA provider

Christenson says the one you pick depends on the kind of investor you're going to be.

If you want to be a hands-off investor, you could consider a "Robo-Advisor" where your investments are managed by computer algorithms in exchange for a small fee. You can find a cost and provider comparison here.

If you want to manage your own investments but don't want to trade very often, Christenson says you could go with a discount online broker like TD Ameritrade or Scottrade. If you plan on trading regularly, you should look at brokers that have the lowest commissions like Charles Schwab and Fidelity (which charge $4.95 a trade).

Alternatively, you could choose an app-based investment platform like RobinHood, which charges literally nothing to place trades.

While the cost of your IRA provider is important, you should also take into account the accessibility of your provider, the quality of service and ease of using their website.

Do I choose a Roth or Traditional IRA?

Which one you choose could depend on your tax bracket right now and whether you prefer to be taxed now or in retirement.

If you are in a higher tax bracket, then you could consider a traditional IRA so you don't pay higher tax on your contributions right now, Christenson says. Instead, you can pay tax in retirement when you're probably going to be in a lower tax bracket.

The pre-tax nature of traditional IRAs might make it easier to save as well if you're on a tight budget right now.

If you're in a lower tax bracket now, consider a Roth IRA so that even if your earnings are higher when you retire, you won't pay any tax on withdrawals.

If you think you might want to take some money out early, then a Roth IRA might be the way to go so you can avoid being hit with a tax bill when you withdraw.

How much should I save?

Ideally you want to max out your IRA contributions every year, but I know money can be tight at times so saving anything, even if it's a small amount, is better than nothing because of the power of compound interest.

This example shows that someone who saves $2,000 per year for 10 years starting at age 30 will end up with about $25,000 more at the age of 65 than someone who contributes $2,000 a year for 25 years starting at age 40.

Before you start saving into an IRA make sure you have enough stashed away in a "rainy day" fund, as it'll be harder and more expensive to access your money in an emergency if it's wrapped up in an IRA.

Next Up

mike freeman

Hennepin County will eliminate bail system for certain non-violent crimes

The reform is backed by Minnesota Attorney General Keith Ellison.

Kirk Cousins

Coller: Vikings vs. Jags is a battle of retool vs. rebuild

Matthew Coller writes a weekly Vikings column for BMTN, with more of his work found at Purple Insider.

Screen Shot 2020-11-23 at 8.35.40 AM

More than 230,000 people have downloaded Minnesota's COVID exposure app

The more people who use the app, the more effective it is.


Despite pandemic, Life Time pushes ahead to open downtown co-working space

It was originally planned to open in the fall, but it has been pushed back to April.

shamrocks irish nook

The Nook issues plea, asks people to order from its other restaurant

Shamrocks Irish Nook has the same food as The Nook, the restaurant owners say.

Screen Shot 2020-12-02 at 9.55.05 PM

Small plane lands on northbound I-35W in Twin Cities

A large police presence is at the scene.


Judge orders Minnesota gym that defied shutdown to close

Attorney General Keith Ellison sued the gym after it remained open.

montana cutbank

Charges: Man shot victim 'without provocation' using sawed-off shotgun

The incident happened on Nov. 24 in Ten Lake Township, located in Beltrami County.

Governor Tim Walz

Watch live: Walz, first responders address Minnesotans

Some departments have been forced to shift staffing or suspend service due to COVID-19.

covid-19, coronavirus

CDC says COVID-19 quarantine period can be cut to 10 or 7 days

You can come out of a 7-day quarantine following exposure provided you've had a negative test.

maple grove fire

1 person found dead inside Maple Grove business that burned down

A person had been unaccounted following the fire that destroyed Hanson Implement and Storage Tuesday night.


The Tip Jar: 4 things millennials should be doing with their money

Just got a job and have no idea how to manage your money? These tips can set you up for the future.

The Tip Jar: How I'm using an app to save and invest money

It's helping me set aside a few extra bucks every week.

The Tip Jar: Best places to catch a cheap movie in the Twin Cities

Want to catch a movie but not pay $10 for a ticket? Here's a guide to the cheapest cinema deals.

The Tip Jar: How to have a cheap staycation in Minnesota

Don't want to stray too far or spend too much this summer? The Tip Jar has you covered.

The Tip Jar: Why your credit score matters, and how to boost it

Want a mortgage? You'll probably need a solid credit score.

The Tip Jar: How to save some money on your internet service

I did it to save money. And now I want to help you save money as well.

The Tip Jar: How to stop yourself spending $27K on your wedding

Seeing the average cost of a wedding is arguably more of a disincentive to get married than a crippling fear of commitment.