En español | If you've hesitated to start saving for retirement because you think you don't have enough money, relax. You don't need thousands of dollars to open an individual retirement account (IRA), one of the best vehicles available for building a nest egg. In fact, you can get started with just $50 at a bank, online brokerage or mutual fund company.
Financial firms love IRAs because they tend to stay in one place. And most are happy to accept low initial investments, especially if you agree to add to them monthly.
Ariel Investments, a mutual fund company in Chicago, requires $1,000 to open a regular taxable account in its flagship stock fund, the Ariel Fund. To open an IRA, though, you need only $50 and an agreement to keep adding funds — called an automatic investment plan (AIP) — until you reach $1,000. USAA's AIP will let you enroll in mutual funds with $50, as will Artisan Partners’ AIP.
What's more, many discount brokerages will let you start an IRA with very little cash. Charles Schwab, for one, will let you open an IRA for any amount. Similarly, E-Trade has no account minimums, nor does TD Ameritrade or Fidelity Investments.
"Saving for retirement doesn't have to be overwhelming, and small steps now can bring big savings in the future, which is why we offer retirement accounts with zero minimum balances and zero annual account fees, with a range of investment options,” says Melissa Ridolfi, vice president of retirement and college planning at Fidelity.
If you invest in a discount brokerage, you have a wide array of mutual funds from which to choose. Not all of them will have the same minimum investment. For example, if you want to buy the Vanguard 500 Index Fund Admiral Shares through Fidelity, the minimum initial investment is $2,500 — and you'll pay a $75 fee to buy shares. But don't be discouraged, as you'll be able to search for funds on the brokerage site that fit your budget for initial investments, even if your budget is a mere $50.
You can also buy low-cost exchange-traded funds (ETFs), which are funds that trade during stock exchange hours the same way stocks do. ETFs and mutual funds typically hold a basket of investments, so they tend to be more diversified and less risky than a single stock. In most cases you just have to figure out how many ETF shares you can afford. If you have $50, you can buy five shares of an ETF whose price is $10. To stretch your savings, be sure to invest in funds that don't charge a trading commission. Many accounts at discount brokerages offer commission-free trading.
Of course, you can also open an IRA at most banks and credit unions. Bear in mind that current interest rates are extremely low and you'll have to shop carefully to find a savings account or certificate of deposit that yields more than 1 percent a year. You can shop online at Bankrate and NerdWallet.
What type of IRA?
You can choose between two types of IRAs.
Traditional If you meet the requirements, your contribution will reduce your taxable income, which, in turn, will reduce your taxes. Your earnings will grow without taxes, but you will owe the government money when you take distributions from your IRA. You can contribute up to $6,000 a year, or $7,000 a year if you're 50 or older.
Roth You'll pay taxes on your contributions, but you won't owe money on contributions or earnings when you withdraw. Contribution limits are the same as with traditional IRAs.
If you or your spouse has access to a workplace retirement plan, the amount you can contribute to traditional and Roth IRAs could be limited. You can, however, open a traditional IRA without deducting your contributions. Your earnings would grow tax-free until you withdrew them.
You have until July 15 to make IRA contributions for the 2019 tax year. The deadline for 2020 contributions is April 15, 2021.
Start small, but keep adding
Bear in mind that putting $50 into an IRA isn't going to get you to a comfortable retirement. Even if you made 10 percent a year on your IRA — which is extremely unlikely — you'd have a grand total of $336 in your account after 20 years.
But it's a start, and if you can make regular monthly contributions, you'll do much better. Say you invest $50 a month for 20 years and average a 5 percent return, you'll have nearly $20,000. If you increase your savings amount annually, you can do even better.
If you have kids in college or you're facing unemployment, making any IRA contribution can seem daunting. But one advantage of the empty nest years, when the kids are out of college and on their own, is that you'll have more free cash to save for your post-work life. “It's a great time to turbocharge your retirement,” says Christine Benz, Morningstar's director of personal finance. “It's not a lost cause."