How to open an IRA?

IRAs, or individual retirement accounts, are a convenient way to stack up funds for your retirement years. Opening an IRA account in most cases is a straightforward and simple process. This is how it’s done.

1. Decide which type of IRA is best for you 

You have two basic options when it comes to IRAs: a traditional IRA or a Roth IRA. The two types are similar in many ways, the most important differentiator is how contributions are taxed. A traditional IRA is a tax-deferred saving account, meaning that the funds you deposit are pre-tax and you will have to pay income taxes when you take the money out in retirement. Conversely, Roth IRA contributions are paid from taxed income and distributions will not be taxed. As a rule of thumb, if you expect your tax burden to increase in the future, you are better off with opening a Roth IRA. Contribution limits for both of these accounts are the same. 

2. Choose a service provider 

You can open an IRA with an institution that has received IRS approval to offer these accounts. Such institutions are banks, brokerages, federally insured credit unions as well as savings and loan associations. Before you choose a service provider, ask yourself how involved you want to be in the management of your IRA.

Most individual investors set up their IRAs with brokers as this allows them to invest in a wider range of financial instruments. IRAs opened at banks generally offer Certificates of Deposit (CDs) and savings accounts, which typically yield lower returns.

Setting up a traditional or Roth IRA with a broker will usually allow you to invest in common securities like stocks, bonds, certificates of deposit, and mutual or exchange-traded funds (ETFs). If you open a self-directed IRA (traditional or Roth), you can choose from an even wider array of investments. 

As the name suggests, if you hold a self-directed IRA account, you will gain access to a broader selection of assets, including precious metals, commodities, private placements, limited partnerships, tax lien certificates, real estate and other alternative investments. In other words, you will directly manage the money in your IRA account even though a custodian or trustee administers the account. In order to open a self-directed IRA, you will need to find a qualified IRA custodian (i.e. financial institution) that offers this type of account. Bear in mind that not all custodians offer the same range of services; if you are after a specific asset (i.e. oil futures), make sure it is available in the custodian’s portfolio of investments. Check the product selection, fee levels and other services offered by a particular broker before making a final decision. Alternatively, check out our recommendation for the best brokers to open an IRA account with.

3. Open an account 

Although account opening will vary slightly by provider, setting up an IRA is pretty easy. You’ll usually visit the provider’s website, choose the type of IRA account you’d like to open (traditional or Roth), and enter personal information such as your Social Security number, contact information, and employment information.  

4. Fund your account and start investing

The general rule is that you can make IRA contributions from earned income but you can also transfer assets from another retirement plan or from another IRA account. Make sure you don’t exceed the annual IRA contribution limits set by the IRS. Note that 401(k) rollovers do not count against these limits.

If you open an IRA at a bank, your investment options will be rather limited and you can simply go for the best CD rates and terms you can find. If you have a bigger risk appetite and you have opted for a brokerage-based IRA, you will need to make more decisions. If you want to make investments and manage them, it is best to use an online broker. If you prefer having your investments managed automatically, consider a robo-advisor.

Remember that you can never be too old to start an IRA. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 eliminated the age limit for IRA contributions, which previously had been 70½. A person of any age with earned income can now open and maintain an IRA. Should you want to set up multiple IRA accounts, go for it. There is no limit on the number of IRA accounts a person can set up, however, the annual contribution caps still apply. In other words, if you open a traditional and a Roth IRA account, you can contribute no more than $6,000 combined (or $7,000 if you are aged 50 or older).