If you like to be hands-off when investing, you can hire a Robo-advisor to select a diverse investment portfolio for you.
If you’re a do-it-yourselfer, you may achieve that diversity on your own for less by constructing a portfolio of index mutual funds and ETFs. To do so, consider how much of your money you want to put into riskier assets, such as stock funds, and how much you want to keep relatively safe, such as in bond funds and cash. This combination is referred to as your asset allocation.
IRAs provide you with access to a diverse range of investing possibilities. Once you’ve determined your allocation, you can choose individual funds to satisfy it.
What if you get stuck? Make use of a model. Examine the portfolios utilized by Robo-advisors (typically published on their websites), then replicate them, being sure to rebalance as needed because they won’t do it for you.
Is that all?
That’s all. Except for a few considerations:
If you have a 401(k) that gives matching funds and aren’t contributing enough to earn them all, you should first put your retirement savings there.
IRAs are classified into two types: Roth and traditional. Traditional IRAs may provide initial tax relief, but we normally prefer the Roth IRA for individuals who qualify. This is why: With a Roth, early withdrawal requirements are significantly more flexible, and there are fewer limits for retirees. Plus, unless you’re a disciplined saver, a Roth IRA will provide you with more after-tax money. Here’s more information on the differences between a Roth and a traditional IRA.
Consider setting up automatic transfers once you’ve determined how much you can contribute. Not only do you eliminate the inconvenience of starting the transfer each month, but you also ensure that you’re saving regularly. (Some brokers will also eliminate their first deposit requirement if you agree to monthly automated transfers.)
Make sure you’re not contributing too much. Contributing more than the annual maximum — $6,000 in 2021 ($7,000 if you are 50 or older) — may result in an IRS penalty. Also, remember that the contribution limit applies to all of your IRA accounts combined; if you have a Roth and a conventional, the restriction applies to all accounts.