How does an IRA work?

Roth or Regular, it doesn’t matter.

I’ve looked all over for information on this and all I get is how I can put away so much a year and how much I’ll get over 30 years and all that other stuff. I know the difference between the two, I just don’t know how it works.

  1. Where does the money reside?
  2. Can all financial institutes be trusted (ex. E*Trade, TD Waterhouse, etc…)
  3. Who uses the money?
  4. Can I choose percentages (ex. 8%, 10%), or do I settle for what the institution offers?
  5. Is the money safe (ex. the Institution goes “Enron” on me)?

Frankly, I find it hard to believe you searched very well. There’s about 18 million sites that explain IRAs very well. I’ll do my best, but it’ll probably be worse than whatever links the next poster puts up.

  1. In banks and computers and such, same as it does now. It’s all bytes and bits. If you invest in a Vanguard IRA, Vanguard has the money. They use it as you have directed/allocated them to do so.

  2. Pretty much all big ones. Or to put it another way: the ones you trust to hold your money at all for whatever reason will be equally trustworthy in regards to IRAs.

  3. Whom/Whatever you allocate it to. Vanguard invests the money for you (example of course) in a total stock market index. They make or lose money, and you do also. The money they used has bought shares of stock from someone else who uses it for whatever they want. It’s only one step removed from a normal stock purchase.

  4. percentages of what? You certainly can’t choose your rate of return, that’s driven by whatever you invested in.

  5. About as safe as your regular checking account. IMO, you can trust any of the big names.
    If you really can’t find anything on the web, ask a random sample of people over 35, odds are good you’ll find a few who have them, they can spell out everything for you.


Actually, Roth IRA vs. Traditional IRA is a significant decision, but first your questions.

The money resides in an account maintained by a custodian. Depending upon the custodian you choose, you will have a number of investment options ranging from money market to purchasing individual stocks. Often the custodian will offer lower or no transaction fees if you purchase one of their mutual funds. But as I wrote, generally you can invest in just about any type of mutual fund or equity. If you invest in a certain company’s stock and that company goes bankrupt then you are looking at the same situation as someone who purchased the stock outside of an IRA.

I don’t understand a couple of your points about percentages and safety–maybe you could elaborate on your question.

The important thing about a traditional IRA is that income on the investment is paid after you take distributions. A Roth IRA means that you use after-tax money, but never pay tax of the future earnings. Of course, IRAs have limitations such as availability of the money and penalties for early withdrawal, but they are great tools for retirement savings.

I strongly suggest hitting a couple of websites line,,, etc. for more information.

If you have any other questions, go ahead.

I knew the difference between the two (Roth and Traditional), I just wasn’t sure if it was treated like a regular bank account or not. The Financial Institution uses my money just like a bank account, but I give them a long term commitment to my money instead with a return.

Getting closer…

They don’t use it like a bank account. In a bank account, they get to do what they want with the money, in exchange for giving you some interest on it.

In an IRA, you choose which of several investment options you want your money to be put into. Vanguard will have certain option, Fidelity will have others, and so on. In exchange for doing the mechanics of investing for you, the investment firm takes a small cut of it, the maintenance fee. The returns you get from the IRA are based on the market, and how the investment option you picked actually performs. An IRA can lose money if you pick the wrong investment.

Whether it’s treated like a bank account depends whether it is a bank account.My husband’s IRA is a CD.