How to Open an IRA

How to Open an IRA

Whether you are just starting out or midway into your career, understanding how to open an IRA and fund it will propel you onto the path to true retirement security.  Anyone with earned income who meets the eligibility requirements can open an IRA. Money within the IRA account grows tax free. We’ll take you step-by-step through the process of how to open an IRA account. You’ll discover how much it costs to open an IRA and how long it takes. Finally, you’ll learn where to open an IRA and whether to choose a Roth or traditional IRA account. 

Steps Required to Open an IRA 

The first step in opening an IRA account is to decide whether you prefer a self-directed IRA or would prefer investment management through a robo-advisor IRA. Then you’ll explore which financial firm is best for you. Finally, you’ll learn whether it’s better to open a Roth or traditional IRA account.

Step 1: Choose between an online broker and a robo-advisor. Choosing an online broker or a robo-advisor depends upon whether you want to select your own investments or you prefer that a digital investment platform considers your preferences and makes the final investment decision for you. 

An online broker, like Fidelity, Charles Schwab or Merrill Edge, is a platform where you can pick and choose from a menu of investment assets. Although there will be customer service representatives available to help with setup and questions, if you open an IRA at an online broker, you’ll be responsible for selecting the investments for your Roth, traditional, or rollover IRA. That will involve picking stocks, bonds, mutual funds, or exchange traded funds. If you are confident in your ability to pick your own investments, or if you are committed to learning the investing basics, then consider opening your IRA with an online broker.

If you aren’t investment-savvy or interested in studying investing strategies, then you might choose an IRA at a robo-advisor platform. Robo-advisors are algorithm-driven digital investment advisors that select and manage your investments for you, based upon your financial goals, time frame, and risk tolerance. You can choose to open a robo-advisor IRA at a stand-alone platform like Wealthfront or Betterment or select a robo managed by a financial firm like Schwab Intelligent Portfolios or Fidelity Go. 

Step 2: Decide where to open an IRA. Once you’ve decided whether to do it yourself or go with a managed robo advisory IRA, you’ll need to select which financial firm is the best fit for you. If you like the idea of having all of your finances under one roof, then you might choose an investment advisor that offers both self-directed investing and robo advisory options. 

When deciding where to open an IRA, investigate annual IRA management fees, investment minimums, available investments, customer service options, and customer reviews. After making your selection, you’ll gather the information needed to open the account. 

Best IRA Accounts for Hands-On Investors

Best IRA Accounts for Hand-Off Investors

Step 3: Choose an IRA to invest in. Next, choose the type of IRA that best fits your tax and financial situation. Understand that Roth and traditional IRAs have eligibility limits, depending upon your income and whether you have a workplace retirement account. We’ll cover two individual IRAs and two workplace IRAs for self-employed individuals. The contribution limits for Roth and traditional IRAs are the same:

2024 Roth and traditional IRA contribution limits are:

• Under age 50: $7,000
• Over age 50: $8,000

Types of IRAs:

• Traditional IRA: Contribute pre-tax dollars up to the contribution limit. The money is not taxed until it is withdrawn in retirement. You can withdraw the traditional IRA contributions penalty-free after age 59½ or if you meet special circumstances before that age. You must begin RMD (required minimum distribution) withdrawals at age 73. A traditional IRA is best if you expect to be in a lower tax bracket in retirement.
• Roth IRA: Contribute after-tax dollars up to the contribution limit. In general, Roth contributions can’t be withdrawn for five years. You can withdraw your initial contribution at any time and for any reason without taxes or penalties. All withdrawals are also tax- and penalty-free after age 59½. Earlier Roth withdrawals are subject to a variety of conditions. Unlike Traditional IRAs, Roth IRAs aren’t subject to RMD withdrawals.
• SEP IRA: A SEP (simplified employee pension) IRA is a way for employers to fund a retirement account for themselves and their employees. The SEP IRA is similar to a traditional IRA, although the contribution limits are higher. Employers can contribute the lesser of up to 25% of the employee’s salary or $69,000 per year. Once contributions are made, the SEP IRA characteristics are the same as those of a traditional IRA.
• Simple IRA: Businesses with 100 or fewer employees are eligible to set up a Simple IRA. Once created, employers are required to contribute to it every year. Employer contributions are 2% or 3% (for matching contributions), and employees can elect to contribute or not. Eligible employees must have earned $5,000 during the last two years and expect to earn $500 this year. The maximum contribution amount in 2024 is $16,000 for those under age 50 and $19,500 for those over age 50. 

Step 4: Open an account. Opening an IRA account involves proving that you are who you say you are by providing personal documentation to support your identity. You’ll need personal and financial information to open an account. Every website has an option to “open an account” which you can select. Then you’ll be asked a series of demographic and financial questions. Below, we discuss the documents that you’ll need to open the IRA account online or in person. 

Step 5: Fund your account. To fund the account, you’ll link an existing financial account with the newly opened IRA. On your bank's website, navigate to the external transfer vertical. Input the requested information about the newly opened IRA. 

If Rolling Over an Existing Account

After leaving an employer, many individuals prefer to roll retirement contributions from a 401(k) or 403(b) plan into an IRA. Or you might want to roll over an IRA from one custodian to another. As long as you perform a trustee-to-trustee rollover, then you won’t owe any taxes. Each financial institution has its own process for completing an IRA rollover, so it’s best to call customer service at your existing retirement plan and request rollover instructions. 

If you withdraw the funds via check or transfer into an existing bank account, you have 60 days to reinvest the money into the IRA, without paying taxes. If you don’t contribute the funds into the IRA within 60 days, you might owe taxes and/or penalties. 

If Funding From a Bank or Brokerage 

When funding your IRA with money from an existing bank or brokerage account, visit the transfer section of your financial institutions website. Select the “external transfer” option and provide information about the IRA account when requested. You’ll have the option to make a one-time transfer to fund the IRA account or to set up regular auto-transfers from the funding account into the IRA. 

What You Need to Open an IRA Account

What you need to open an IRA account is similar to the information you need to open a taxable brokerage account. Although the process is similar across platforms, each IRA custodian may have a distinct process for opening an IRA online. 

Personal Information

Detailed personal information is required to open an IRA online or in person, to prove that you are who you claim to be. Before you open the IRA, it’s best to compile all of the required documentation. You’ll need to consider how you’ll fund the IRA as well as the beneficiary of the account. 

• Full name, address, and telephone number
• Social Security number
• Driver’s license number
• Date of birth
• Beneficiary information
• Employer information
• Investment objectives and risk tolerance

Banking Information 

Providing your banking information enables the IRA custodian to accept cash transfers from your financial institution into the IRA account. You’ll also need to set up external or internal transfers at your bank to fund the IRA account. It’s easy to access your banking information from a blank check and your online bank statement. After opening the IRA account, you may want to set up an automatic transfer from your bank into the IRA account. 

To fund the account, you’ll need the following banking information:

• Name and address of bank
• Name of account holder(s)
• Type of account (checking or savings)
• Account number
• Bank routing number 

Factors to Consider When Opening an IRA Account 

• How much to invest: In general, it’s best to contribute the maximum amount allowable by law annually. Since the future is uncertain, the more money you invest and the earlier you begin, the more likely it is that you’ll meet your retirement goals. 
• How much an IRA earns: This will depend upon the investments that you select. In general, you can expect a well-diversified IRA invested in a mix of stock and bond ETFs to earn between 6% and 8% per year on average, depending upon your asset allocation.
• Age: The younger you begin contributing to your IRA, the less money you’ll need in total. That’s because of the impact of compounding returns. 
• Account fees: Review the IRA management fees as well as the expense ratios for the ETFs or mutual funds. Lower fees enable more of your money to grow and compound in the investment markets.
• Investment options: Review the available investments before opening an IRA. Make sure that your preferred investments are available in the IRA. 
• Customer service: IRA account holders should have access to phone customer service. Visit the “contact us” page to familiarize yourself with methods and hours for support. 

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