Choosing the Right IRA and Pick Stocks, too

Dear Retirement Adviser,

I want to find information on a self-directed retirement account, whether it is a Roth individual retirement account or something else. I was hoping to find out that I'll be able to initiate purchases and sales of stocks and bonds that I want to pick, along with advice of the company servicing the account. Please help me. How can I learn about options along these lines?


-Charles A. Count

Dear Charles,

If you're not dealing with an employer-sponsored plan, then you are looking at a self-directed Roth IRA or traditional IRA. The Roth IRA has income limitations on who can contribute. The traditional IRA has limits on making tax-deductible contributions if you're eligible to contribute to an employer plan. Of course, you can always make after-tax contributions to a traditional IRA and then convert them to a Roth IRA. Talk to your tax professional if that is confusing.

In general, tax-deferred contributions to a traditional IRA make the most sense if you expect to be in a lower tax bracket in retirement than you are in when you make the contribution. By contrast, Roth IRA contributions make the most sense when you expect to be in a higher tax bracket in retirement. Bankrate offers an online IRA interactive calculator that will help you decide between the two accounts.

If you're picking individual stocks and bonds, then you need a brokerage account for your IRA. That's in contrast to an account held with a mutual fund. It gets confusing if you have a brokerage account with a bank, mutual fund or traditional brokerage fund.

You can choose bare-bones approaches to fees and expenses by going with a discount brokerage firm and making your own investment choices. Your letter indicates that you want some advice in making those stock picks, so you have to gauge the quality of the advice and what you're willing to pay for it.

The issue in just starting out with an IRA, assuming you have no rollover contributions, is that there isn't a whole lot of money in the account. It's hard to turn a financial professional's head when it comes to managing your maximum 2013 tax-year contribution of $5,500, or $6,500 if you're age 50 or older. You may be better off looking at a low-cost brokerage account where you invest in one or two exchange-traded funds, or ETFs, that track a broad-based equity or bond market index. Some brokerage accounts allow you to trade ETFs commission-free. Keep in mind that it's not a lifetime commitment. You can move the account if you're not happy with the service or expenses. I'd suggest building a war chest over several years before shopping for professional investment advice on individual securities.

I also suggest shopping around for providers, including online brokerage firms with no fee IRA accounts. Bankrate's "Compare Online Brokerages" tool can help you research these brokerages. Then, you can choose the provider that seems to be the best fit for fees, expenses and advice.

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