Individual Retirement Arrangements (IRA)

IRAs, or Individual Retirement Arrangements, are accounts that provide tax benefits for retirement savings. You can open one in addition to contributing to a workplace 401(k), or you can use one to score tax breaks for retirement investing when you don't have a plan at work.

While there are lots of advantages to opening an IRA, there are eligibility restrictions to be aware of. It can also be confusing to figure out where you should open your IRA or what you can do with it once you've got it.

This guide will walk you through the steps of starting an IRA, which include:

• Deciding what kind of IRA you want: Depending on your situation, you could invest in a traditional IRA, a Roth IRA, a SEP IRA, or a SIMPLE IRA.
• Making sure you're eligible for tax breaks or IRA contributions: There are income limits in some situations.
• Deciding where to open your IRA: You could open an IRA with an online broker; a robo-advisor; a peer-to-peer lender; a bank; or other financial institutions. Completing the paperwork to open an IRA: You can usually fill out the paperwork online and get your account open within minutes.
• Funding your account: You can make an initial transfer of funds and may wish to set up automatic contributions. Choosing your investments: You could put your money into stocks, bonds or mutual funds or buy other assets.

What kind of IRA should I open? The first thing to know about IRAs is that there are four kinds to choose between, depending on your situation. Options include the following:

A traditional IRA

Traditional IRAs are simple accounts you can open whether you work for yourself or for an employer. If you don't have a workplace retirement plan, you can always get tax breaks for traditional IRA contributions in the year you put money into your account. If you or your spouse has a workplace plan, you may still be able to save on taxes for contributions, depending on income.

There are annual limits to deductible contributions. For 2019, you're limited to claiming tax breaks on a maximum of $6,000 in contributions if you're under 50 and qualify for the full deduction. If you're over 50, you can make an additional $1,000 catch-up contribution.

A Roth IRA

Roth IRAs can also be opened if you work for a company or are self-employed -- but they work differently. You put money into your Roth IRA with after-tax dollars but are allowed to withdraw money tax-free in retirement.

There are also annual limits on contributions. In fact, the same annual limit applies to a traditional and Roth IRA, and it's an aggregate limit. You can contribute a total of $6,000 (or $7,000 with catch up contributions) to a Roth and/or Traditional IRA. You could put your entire contribution into a Roth IRA; the full amount into a traditional IRA; or some into each account. But you can't put $6,000 or $7,000 into a Roth IRA and another $6,000 or $7,000 into a traditional IRA.

A SIMPLE IRS

The "SIMPLE" stands for Savings Incentive Match Plan for Employees. You can invest in a SIMPLE IRA if your employer offers one or can open one for yourself if you're a sole proprietor or have your own business.

Contribution limits for SIMPLE IRAs are higher than traditional or Roth IRAs. You can contribute up to $13,000 in 2019 and make additional catch-up contributions up to $3,000 if you're over 50. Contributions come out of your salary and are called salary reduction contributions. They can't exceed net earnings from self-employment from the business that created the plan.

Employers also must contribute to a SIMPLE IRA for employees. If you're a sole proprietor or run a business, you're considered to be your own employer. Acting as an employer, you must either match salary reduction contributions on a dollar-for-dollar basis up to 3% of net earnings from self employment or must make a required contribution of 2% of net earnings from self-employment, up to a maximum of $280,000 in net earnings.

A SEP IRA

"SEP" IRA stands for Simplified Employee Pension. You can establish a SEP if you're self-employed or run your own company, or an employer can establish one for you.

Only employers can contribute to a SEP, and the maximum contribution for 2019 is the lesser of $56,000 or 25% of employee compensation up to $280,000. If you're self-employed, you can make contributions for yourself up to 25% of net earnings from self-employment or a maximum of $56,000.