How to Open an IRA

SHORT ANSWER: Opening an IRA is as simple as selecting an account type, whether you want to choose your investments or partner with an advisor, and inputting some basic personal information.

No matter how old you are, if you have earned income, you can start an individual retirement account (IRA). These accounts are a smart way to save more aggressively toward retirement, even if you have a 401(k) or other investment account through your employer. 

Money in an IRA grows tax-free to help you plan for your future, making it no surprise that 40% of all U.S. households have an IRA account of some type. Learn how to open an IRA in a few easy steps.

How to Open an IRA in 6 Steps

No matter the broker or bank you choose for opening an IRA, you’ll find the process fairly simple. The hardest part is choosing the best partner for you because it will take time to evaluate what will work best. Here’s a look at the steps you should follow.

Step 1: Choose an Account Type

As you evaluate your IRA options, decide whether you want a self-directed or guided account. With a guided account, you can also choose between an actual advisor or a robo-advisor. With a self-guided account, you’ll choose your investment assets. While customer service representatives can support you when you have questions, you won’t have a financial advisor or skilled professional assisting you with selecting investments that match your needs. You’ll execute all trades and rebalances yourself.

When you have a self-guided account, you select each stock, bond, mutual fund, cryptocurrency and real estate investment trust (REIT) that makes up your investment portfolio. You’ll need to know the basics of investing.

People who are not as savvy with investments benefit from a guided account. Robo-advisors are the more affordable way to meet your needs while still getting help choosing investments. These accounts use algorithms and the information you tell them to aid in finding good investments for you. Some accounts use timeframes, such as the year you plan to retire, to inform decision-making.

Step 2: Select an IRA Type

You can have more than one IRA account, but opening all at the same time might complicate things for you. Instead, try to choose one that best fits your needs and make a plan for how you’ll contribute to it regularly.

You have four main options when choosing an IRA type:

1. Traditional IRA: This uses pretax dollars to help you lower your taxes now. You can withdraw from the account without penalties starting at age 59½ and must start taking distributions by age 73. Traditional IRAs are good for people who expect to be in a lower tax bracket in retirement.
2. Roth IRA: In contrast to a traditional IRA, a Roth IRA uses after-tax dollars. You can’t withdraw from your account for five years after opening it, but once you’ve met that requirement you can take distributions starting at age 59½. Unlike a traditional IRA, there is no specific timeframe for when you must start taking distributions. Hold the funds as long as you want or transfer them to your heirs tax-free.
3. Simplified Employee Pension Plan (SEP) IRA: This is an employer-sponsored plan, meaning you can’t open this unless your employer provides it as an option. The employer can contribute up to 25% of your salary or $69,000 per year, whichever amount is less. The account functions a great deal like a traditional IRA.
4. Simple IRA: This is another employer-sponsored plan. Employers with 100 or fewer employees can set up these accounts. They must contribute to it every year once they get it started. Generally, employer contributions are 2% to 3% whether an employee contributes or not. To be eligible for the plan, the employee must have made $5,000 or more within the last two years.

As an individual, your only options are a traditional or Roth IRA unless your employer offers you a SEP or Simple IRA. With a traditional or Roth account, you can contribute up to $7,000 per year if you are younger than 50 or $8,000 per year if you are older than 50.

Step 3: Select a Bank or Brokerage Partner

Now you’re ready to explore firms or brokerage providers to find a good fit based on the amount of money you have to invest and your investment interests. 

An easy option is to look into whether your current bank has an IRA option. If so, this will make managing your account simple because you’ll handle one login for all accounts. 

Some accounts offer the option to have both self-directed and robo-advisor accounts. This can blend the best of both worlds to help you manage your finances.

Some key factors to consider when shopping for an IRA provider include:

• Fees
• Investment minimums
• Investment options available, such as stocks, bonds or mutual funds
• Customer service availability and communication channels
• What existing customers have to say about their accounts and service

Step 4: Open Your Account

You’ve made all your important selections. Now you just need to provide all important details to your chosen provider to open your account. You’ll need personal documentation that proves you are who you say you are. Most banks allow you to do this online.

Be prepared to answer financial questions and complete demographic information. Make sure you have time when you sit down to do this as you’ll need to complete the basic information all at once.

Step 5: Move Money to Your Account

Once your account is set up, you’ll need to fund the account. You can do this by setting recurring money transfers or you can do your transfers manually when you choose to do so.

Step 6: Choose Your Investments (For Self-guided Accounts)

When the money clears your account and is deposited into your IRA, you’re ready to select your investments if you have a self-guided account. You might have to check back a few days after you request the transfer before the funds are available. Don’t forget this step because not choosing investments will mean your money just sits there.

What Do You Need to Open an IRA Account?

Part of learning how to open an IRA account is understanding what is required to complete the process. Here’s a look so you can gather materials.

• Your personal information: This is fairly basic information, including your birth date, driver’s license number, Social Security number, address and phone number. You’ll also need to include information about your beneficiaries and investment objectives to help inform the account.
• Banking information for transfers: Select the bank account you want to transfer funds from and be ready with your account type, account number and routing number. These will be required to fund the account with automatic transfers. Otherwise, you’ll need to mail checks to transfer funds, which is more cumbersome.

What to Consider When Opening an IRA Account 

As you look at getting started with an IRA, consider these factors:

• Investment amounts: To get the most from your account, you should max out your contributions based on your age. The more you can invest while you’re young, the better.
• Return rates: This will vary based on the selections you make for your account. The more you diversify your investments, the more likely you’ll see strong returns. On average, accounts earn 6% to 8% annually. But it all depends on your risk tolerance. 
• Timeline: the sooner you start contributing to your account the better. And the more you contribute to start, the faster your money will compound. Often people slow their contributions during the middle of their life while they are enjoying travel, raising children or advancing their educations because all of these lifestyle factors put a strain on finances.
• Fees: Account fees can reduce the total return rates you see on your account. The lower the account fees are, the faster your money will grow. Many accounts charge negligible fees, but you’ll want to be aware of them just the same.
• Investment options: Before selecting the IRA type and provider, consider the investment options that will be available to you. The more diverse the options, the more you’ll future-proof your account.
• Access to support: Some accounts only offer online chat. Others take phone calls 24/7. Depending on your confidence level with investing and how much you think you’ll lean on the account in retirement, you might want to look deeper into the customer service your account offers.

Pros and Cons of IRAs

Like any financial tool, IRAs have benefits and risks. Review them before funding your account so you can move forward with confidence and the necessary information to get the most from your account.

IRA Benefits

• Retirement savings that grow at a decent rate in most cases
• Tax reductions either now or in retirement
• A variety of investment types to choose from
• IRA account types that match your needs to help lower your taxes now or keep them low during retirement

IRA Risks

• Penalties for withdrawing funds before age 59½ are possible unless you experience extenuating circumstances.
• Self-directed accounts require some investing know-how that you might not have.
• Some account providers charge high fees that greatly reduce the returns you can see on these accounts if you aren’t vigilant.
• As your career grows, your income could exceed the maximum allowable, meaning you won’t be able to contribute to the account unless your income falls below that threshold again.
• With a traditional IRA, you could end up paying more in taxes if you end up in a higher tax bracket than when you were working, leading to paying more in taxes than you would have with a Roth IRA.
• Traditional IRAs require that you start taking distributions at age 73.

Tax Advantages While Saving for Retirement

An IRA can help you lower your taxes today while saving for tomorrow. Or, you can use it to keep your taxes low during retirement with a Roth IRA. The process for opening an account is fairly simple so all you have to do is select the account type and provider that are right for you and start planning for a vibrant future.

Frequently Asked Questions