The Best Traditional IRA

By Selena Maranjian Markets Fool.com

"Retirement is not in my vocabulary. They aren't going to get rid of me that way."
-- Betty White

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Many of us may agree with Betty White and not want her to retire, but when it comes to our own work lives, retirement is more appealing.

When you need to save for retirement, as most of us do, it's hard to beat the power of an IRA. Still, it's easy to get confused trying to figure out which is the best IRA provider among many companies and how an individual can open an IRA. Here's how you can do a quick comparison and successfully save for retirement in an IRA.

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Two types of IRAs -- traditional and Roth

First, it's important to understand that there are two main kinds of IRAs -- the traditional IRA and the Roth IRA. Each offers a different tax-advantaged way to sock money away for retirement.

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Roth IRAs tend to get a lot of attention. With them, you contribute post-tax money and get no upfront tax break. The Roth IRA's tax break happens later, when you withdraw funds, typically in retirement. At that time, if you've followed the rules (such as having contributed to the account for the first time at least five years ago), the money you withdraw is all tax free.

With a traditional IRA, you contribute pre-tax dollars, reducing your taxable income for the year, and thereby reducing your taxes, too. (Taxable income of $75,000 and a $5,000 contribution? Your taxable income for the year will drop to $70,000.) The money grows in your account and is taxed at your ordinary income tax rate when you withdraw it in retirement.

Given these terms, many people see the Roth as the preferable option. But traditional IRAs can make good sense, too, in certain cases. For example, if you're in a high tax bracket now and expect to be in a low one in retirement, you can avoid paying taxes at the high rate on a chunk of your income now, and pay taxes later, at the lower rate.

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The power of the IRA account

For best results when saving for retirement with an IRA, contribute as much as you can -- and as soon as you can. The longer your money has to grow, the more it can grow. The IRA contribution limit for 2017 is the same as it was in 2016: $5,500. There's an additional $1,000 "catch-up" contribution permitted for those age 50 or older, giving them a total allowed contribution of $6,500 for the year.

If that doesn't seem like much, check out the following table, which shows how much money you can accumulate with annual $5,500 contributions at different average annual rates of growth:

Growing For...

Growing at 8%

Growing at 10%

Growing at 12%

15 years

$161,284

$192,224

$229,643

20 years

$271,826

$346,514

$443,843

25 years

$434,239

$595,000

$821,337

30 years

$672,900

$995,189

$1.5 million

Source: Calculations by author.

See? Given enough time and annual contributions of just $5,500, you might accumulate well over half a million dollars! Better still, contribution limits are hiked over time, so you can contribute much more in the future. Plus, you might also save via 401(k) accounts through your employer or in other accounts of your own.

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The best traditional IRA an individual can open

So which is the best traditional IRA? Well, all traditional IRAs are, in a sense, the same. They are bound by the same rules, sport the same contribution limits, and enjoy the same tax breaks.

Still, it can matter where you open your IRA. Many financial services companies, such as brokerages, banks, and mutual fund companies, offer IRAs. You might prefer a particular company for any of a number of reasons. If you do a lot of business with one company and like it, you might want to stick with it. Having different accounts at one institution can make it extra easy to move money between accounts when you want to -- such as if you want to fund your IRA with money from a brokerage or bank account.

While retirement accounts such as 401(k)s and 403(b)s tend to offer you a limited menu of investment options, such as a handful of mutual funds, IRAs can be much more liberal. An IRA opened through your brokerage will let you invest in just about any stock through it, as well as whichever mutual funds the brokerage offers, which can be hundreds or thousands. Opening your traditional IRA with a particular mutual fund company, though, can limit you only to the funds of that company. Keep these considerations in mind as you do your comparison shopping.

Consider, too, any fees you will be charged, such as trading commissions. These days it's common to see commissions of $10, $7, $5, or less. If you expect to do a lot of trading, it will be more valuable to choose a provider with very low commissions. Also, look into what minimum amount of money is required for opening an IRA account. Some providers sport no minimum, while others might require at least $1,000 or more.

Our IRA center offers a handy chart featuring a handful of solid IRA providers for your comparison-shopping pleasure.

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Making the most of your IRA

Once you open an IRA account, which you can often do online -- you'll just need to fund it. That can be done online, sometimes by phoning in payment information, or by mailing in a check. Next, you'll want invest your hard-earned dollars as effectively as you can. It can make sense to invest in taxable bonds in a traditional IRA, because bond interest is taxed at ordinary income tax rates, which can be high. With a traditional IRA, you can defer being taxed until retirement. It's the same if you want to trade stocks frequently and expect to accumulate lots of short-term gains, as those gains are also taxed at your income tax rate.

Of course, frequent trading isn't the best route to investment riches. For most of us, a simple, inexpensive index fund or a few of them can be all we need. There are lots of index funds to choose from.

Don't neglect your retirement planning and preparation, and consider a traditional IRA as part of your plan. (Consider Roth IRAs, too -- different IRAs are the best IRAs for different people.)

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Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.