Monday, March 7, 2016

What is an IRA?

Sometimes, it just isn’t very easy to turn up easy to use financial information that you can use to make smart financial decisions in your own life. If anything, the internet should have made it easier to find that information, but strangely, the inverse is true. There’s so much information, that you end up searching for a needle in a haystack. Hopefully, you found this particular “needle” in good time before the deluge of people and corporations trying to sell you investment products got hold of you. 

Individual Retirement Accounts, IRAs, have risen to a particular prominence in the investing world today. With the end of wide spread pension availability, and the moderately stagnant growth of many 401-k programs, IRAs offer a way to save for retirement above and beyond your employer-sponsored 401-k that you can easily self-direct.

What’s wrong with 401-k? 

Really, there’s nothing wrong with 401-k programs today for most investors. Most employers offer them with a little bit of matched contribution added on that kicks in after a set number of years worked, and unlike some other funds, you don’t have to deal with fees. That said, there is a point of diminishing returns in 401-k programs. For instance, if you max out your contribution, and your employer maxes theirs out, then the extra money you put in is doing you good in the long term, but could potentially be put to greater use elsewhere. an IRA is just such a place to park that extra money where you can, if you wish, more directly control what’s happening in your investments. 

Why would I want an IRA to “Directly control my investments?”

For the most part, 401-k plans invest directly into stock and bond funds, in the form of mutual funds. This means that one investment plan might contain a large number of stocks broken down into much smaller, manageable pieces that an individual investor might not be able to purchase readily. Berkshire Hathaway is one (expensive) example that simply isn’t efficient for many investors to purchase on a share-by-share basis. In this case, a 401-k might purchase .2% of Berkshire fund stock for your portfolio since they’ve likely got thousands of investors in that program, and can afford to spread out the cost of 500 to 1000 shares of an expensive stock like that over all their investors.

On the other hand, you might want to pick up some dividend stocks on your own. For individual stock purchases, you need to have an IRA set up, since you can’t pick individual stocks through a 401-k.

To wrap up, IRA’s are a great idea for most investors for a wide variety of personal reasons, but as with any investment, you need to look before you leap. Check a few online brokerages before you invest, as these are typically the easiest way to get into an IRA unless you go through your local bank. Either way, good luck, and happy investing!

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