Table of Contents
Discover how to open an IRA and begin investing for your future.
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How to Open an IRA
Whether you’re just starting out or in the middle of your career, learning how to open an IRA and fund it is crucial for a secure retirement. Anyone with earned income who meets certain requirements can open an IRA. The money you put into an IRA grows without being taxed. We’ll guide you through the process, including the costs involved and how long it takes. You’ll also find out where to open an IRA and decide between a Roth or traditional IRA.
Steps Required to Open an IRA
First, choose between a self-directed IRA or a robo-advisor IRA to start an IRA. Then, find the right financial firm for you. Lastly, decide whether a Roth or traditional IRA suits you better.
Step 1: Choose between an online broker and a robo-advisor. Whether you want to pick your investments or let a digital platform choose based on your preferences is crucial when deciding between an online broker and a robo-advisor.
An online broker, like Fidelity, Charles Schwab, or Merrill Edge, is a platform where you can choose from a selection of investment options. If you open an IRA with an online broker, select the investments for your Roth, traditional, or rollover IRA yourself. This includes choosing stocks, bonds, mutual funds, or exchange-traded funds. If you feel confident in your ability to choose investments or are interested in learning about investing, opening an IRA with an online broker might be a good option for you.
If you’re unfamiliar with investing or don’t want to learn about investing strategies, consider opening an IRA with a robo-advisor platform. Robo-advisors are digital investment advisors who use algorithms to choose and manage your investments based on your financial goals, how long you want to invest, and how much risk you’re comfortable with. You can open a robo-advisor IRA on a platform like Wealthfront or Betterment or through a financial firm like Schwab Intelligent Portfolios or Fidelity Go.
Step 2: Decide where to open an IRA. Once you’ve chosen whether to manage your investments or use a robo-advisor, you must pick the right financial firm. If you prefer having all your financial services in one place, consider choosing an investment advisor offering self-directed investing and robo-advisory options.
When choosing where to open an IRA, consider the annual management fees, investment minimums, available investment options, customer service availability, and customer reviews. Once you’ve decided, gather the necessary information to open the account.
Best IRA Accounts for Hands-On Investors
| Company | Fees | Account Minimum | IRA Account Types |
|---|---|---|---|
| Fidelity | $0 for stock/ETF trades, $0 plus $0.65/contract for options trade | $0 | -Traditional IRA -Roth IRA -Rollover IRA -Inherited IRA -Inherited Roth IRA -Simplified employee pension (SEP) IRA -Self-employed 401(k) -SIMPLE IRA -401(k) plan for small businesses -Roth IRA for kids |
| Charles Schwab | Free stock and ETF trading, $0.65 per options contract | $0 | -Traditional IRA -Roth IRA -Rollover IRA -Inherited IRA -Custodial IRA -Simplified employee pension (SEP) IRA -Self-employed 401(k) SIMPLE IRA -401(k) plan for small businesses -Personal defined benefit plan -Company retirement account (CRA) |
| Merrill Edge | $0 per stock trade. Options trades $0 per leg plus $0.65 per contract | $0 | -Traditional IRA -Roth IRA -Rollover IRA -Inherited IRA -Simplified employee pension (SEP) IRA -SIMPLE IRA -Self-employed 401(k) |
Best IRA Accounts for Hand-Off Investors
| Company | Fees | Account Minimum | IRA Account Types |
|---|---|---|---|
| Wealthfront | 0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers | $500 | -Traditional IRA -Roth IRA -Rollover IRA -Simplified employee pension (SEP) IRA |
| M1 Finance | 0% | $100 ($500 minimum for retirement accounts) | -Traditional IRA -Roth IRA -Rollover IRA -Simplified employee pension (SEP) IRA |
| Betterment | 0.25% or $4 per month based on balance or recurring deposit | $0, $10 to get started | -Traditional IRA -Roth IRA -Inherited IRA -Simplified employee pension (SEP) IRA |
Step 3: Choose an IRA to invest in.
Sure! When deciding on an IRA, consider your tax and financial situation. Roth and traditional IRAs have different eligibility limits based on income and workplace retirement accounts. Let’s explore two individual IRAs and two workplace IRAs for self-employed individuals. Both Roth and traditional IRAs have the same contribution limits.
In 2023, the maximum amount you can contribute to both Roth and traditional IRAs is the same.
- Under age 50: $6500
- Over age 50: $7500
Types of IRAs:
- Traditional IRA: You can put money into a traditional IRA before taxes up to a certain limit. This money isn’t taxed until you take it out during retirement. After you’re 59 and a half years old, or in special situations, you can deduct your contributions without a penalty. Starting at age 73, you must take out a minimum amount each year. A traditional IRA is a good choice if you think you’ll be in a lower tax bracket when you retire.
- Roth IRA: You can put money into a Roth IRA with after-tax dollars up to a certain limit. Normally, you can’t take out your Roth contributions for five years. However, you can withdraw your initial contribution anytime without paying taxes or penalties, no matter the reason. After you’re 59 and a half years old, you can withdraw money from your Roth IRA without paying taxes or penalties. If you need to take out money earlier, specific conditions exist. Unlike Traditional IRAs, Roth IRAs don’t require paying a minimum amount yearly.
- SEP IRA: A SEP (Simplified Employee Pension) IRA lets employers save for retirement for themselves and their employees. It’s like a traditional IRA but with higher contribution limits. Employers can contribute up to 25% of an employee’s salary or $66,000 annually, whichever is less. After contributions are made, a SEP IRA works just like a traditional IRA.
- Simple IRA: Small businesses with 100 or fewer employees can establish a retirement plan. Once set up, employers must make annual contributions. Employers contribute 2% or 3% for matching contributions, while employees can contribute too. To be eligible, employees must have earned at least $5,000 in the last two years and expect to earn $500 this year. In 2023, the maximum contribution for those under 50 is $15,500; for those over 50, it’s $19,000.
Step 4: Open an account. To open an IRA account, you must verify your identity by providing personal documents, including personal and financial details. Most websites have an “open an account” option. Then, you’ll need to answer some questions about yourself and your finances. Here, we’ll discuss the documents required to open an IRA account, whether online or in person.
Step 5: Fund your account. To fund your newly opened IRA, you’ll connect it to an existing financial account. Go to your bank’s website and find the section for external transfers. Then, enter the necessary details about your new IRA account.
If Rolling Over an Existing Account
After leaving a job, many people move their retirement savings from a 401(k) or 403(b) plan into an IRA. You can also transfer an IRA from one place to another. If you do it correctly, you won’t have to pay taxes, called a trustee-to-trustee rollover. Each financial company has its way of doing this, so it’s a good idea to call customer service about your current retirement plan and ask for instructions on moving your money.
If you take out money from your IRA with a check or move it to your bank account, you have 60 days to return it to another IRA without facing taxes. But if you don’t do this within 60 days, you could owe taxes or penalties.
If Funding From a Bank or Brokerage
To put money into your IRA from a bank or brokerage account you already have, go to your financial institution’s website and find the transfer section. Choose the “external transfer” option and give the details of your IRA account when asked. You can transfer money just once to fund your IRA or set up automatic transfers from your funding account into the IRA regularly.
What You Need to Open an IRA Account
The information required to open an IRA is similar to what you need for a taxable brokerage account. While the process is generally the same on different platforms, each IRA provider might have its specific steps for opening an IRA online.
Personal Information
To open an IRA online or in person, you must provide detailed personal information to verify your identity. Before starting the process, gather all the necessary documents. Consider how you’ll put money into the IRA and who will be the account beneficiary.
- Your complete name, home address, and phone number.
- Your Social Security number (SSN).
- Your driver’s license number.
- Your birth date.
- Details about who will receive the money if something happens to you.
- Information about your employer.
- What are your goals for investing, and how much risk are you comfortable with?
Banking Information
Giving your bank details allows the IRA provider to get money from your bank into your IRA account. You’ll also need to arrange transfers at your bank to move money into the IRA. Getting your bank details from a blank check and online bank statement is simple. Once your IRA is open, you might want to schedule automatic transfers from your bank to your IRA.
To put money into the account, you’ll need the following bank details:
- Bank’s name and location
- Account holder’s name(s)
- Account type (checking or savings)
- Account identification number
- Bank routing code
Factors to Consider When Opening an IRA Account
- How much to invest: Investing the most you can each year is smart. Because we can’t predict the future, investing more money and starting early increases your chances of reaching your retirement goals.
- How much an IRA earns: The amount you make will vary based on your investment choices. Typically, a diversified IRA with stocks and bonds could earn around 6% to 8% per year, depending on how you divide your assets.
- Age: Starting to contribute to your IRA at a younger age means you’ll need less money overall. This is because of how compound returns grow over time.
- Account fees: Check the fees for managing your IRA and the expenses for the ETFs or mutual funds you invest in. Lower fees mean more of your money can grow over time in the investment markets.
- Investment options: Before opening an IRA, check out the options and ensure the investments you want are available.
- Customer service: If you have an IRA account, you should be able to call customer service for help. Check the “Contact Us” page to learn how and when to get support.
FAQs
1. What Is an IRA?
Ans: An individual retirement account, or IRA, allows individuals with earned income to save and invest for retirement. In an IRA, money is invested for retirement and grows tax-free or tax-deferred. There are three types of IRAs: traditional, Roth, and rollover.
- Traditional IRA: You invest money before taxes, and it grows without taxes. When you retire, you’ll pay taxes on the money you take out.
- Roth IRA: Pay taxes on your money upfront before putting it into your Roth IRA. Your money will grow without taxes, and you won’t pay taxes when you take it out later.
- Rollover IRA: Move money from an old employer’s retirement plan into an IRA, like a 401(k) or 403(b). The new IRA will let your money grow without taxes or with taxes delayed, based on whether your old retirement account was Roth (after-tax) or traditional (before-tax).
2. How Does an IRA Work?
Ans: The three types of IRAs, traditional, Roth, and rollover, all work similarly. If you earn income from a job, you can put some money up to the IRA limit into your account. After the money is in the account, you decide how to invest it. You can choose to invest in individual stocks, bonds, or funds. Your money will grow without taxes or with taxes delayed until you take it out, when you might need to pay income taxes. Traditional IRAs use money before taxes, so you’ll owe taxes when you withdraw it. Roth IRAs use money after taxes and can be taken out without paying taxes.
You can take out your money without a penalty once you reach age 59½ or older. If you take it out earlier, you may have to pay a 10% penalty and income taxes, although this rule has some exceptions.
3. How Much Money Do You Need to Open an IRA?
Ans: Here are the requirements for opening an IRA:
- The money you use to open an IRA cannot exceed what you earned that year.
- According to IRS rules, you cannot open an IRA with more than $6,500 under 50 years old or $7,500 if you’re 50 or older.
- You might be unable to add money to an IRA if your modified adjusted gross income (MAGI) exceeds specific limits.
- Some investment platforms might ask for a minimum amount of money to start an IRA.
The minimum amount required to open an IRA depends on the account provider. It can’t be more than what you earn, and it must follow IRS rules.
4. What Type of IRA Is Best to Start?
Ans: Choosing the right IRA involves looking ahead. A traditional IRA is best if you’ll pay less tax in retirement than now. With a traditional IRA, you only pay taxes on the money you take out when you retire. At age 73, you must start taking out a minimum amount each year.
Deciding on a Roth IRA is tricky. A Roth IRA could be a good choice if you’re in a lower tax bracket now and would rather pay taxes upfront than in retirement. With a Roth, you pay taxes on the money when you earn it and before you invest it. Then, your Roth IRA grows without taxes, and you can take out the money without paying taxes later. Unlike a traditional IRA, you don’t have to take out money from a Roth when you retire.
5. How Much Monthly Income Should Go to an IRA?
Ans: If you want a good amount of money for retirement, aim to invest the maximum allowed in your IRA each year. If you’re under 50, that’s about $541.66 per month, up to $6,500 annually. For those over 50, you can invest around $625 monthly, totaling $7,500 annually.
If you can’t invest the maximum amount, invest whatever you can afford. You can always increase your IRA contributions later on.
6. What Are the Risks Associated With IRAs?
Ans: The potential downsides of IRAs are:
- With a traditional IRA, taking out your money before you’re 59½ years old means you’ll face a 10% penalty on the amount you withdraw, plus income tax. However, this penalty has some exceptions, like using the money to pay for medical insurance after losing your job. The Roth IRA also has its own rules about early withdrawals.
- In the end, if you’re not using a robo-advisor, you are responsible for picking and managing your investments. You might not have the knowledge or experience to choose the right investments.
- Some IRA providers take advantage of people by charging high fees and selling inappropriate or possibly fraudulent investments.
- You might earn too much money to qualify for the maximum contribution law allows.
- Investing in a traditional IRA could mean facing higher taxes during retirement if your income tax rate goes up.
- During retirement, people with traditional IRAs must take Required Minimum Distributions (RMDs) from their accounts, which can lead to higher income taxes.
