How to Open an IRA in 5 Steps

An individual retirement account, or IRA, is a tax-advantaged account designed to help you save more money for retirement. Both traditional and Roth IRAs are powerful tools that offer extra tax benefits compared to other savings and investment accounts.

Unlike other kinds of retirement accounts—such as employer-sponsored 401(k) plans—IRAs are available to almost everyone, and the process of establishing an account is straightforward. From eligibility to funding, here's how to open an IRA in a few steps.

Who can open an IRA?

An IRA is a type of retirement savings account where the funds can be invested and used to save for the future. Anyone who has earned income during the year can make contributions to a traditional IRA. Unlike 401(k)s, 403(b)s, simplified employee pension plans and other employer-directed retirement savings plans, IRAs are available outside of the workplace—making them an ideal way to save for retirement if you're self-employed.

Adding an IRA to your retirement savings strategy can be a great way to maximize your efforts and potentially even minimize your tax burden. Once you have a general understanding of how IRAs work, your first step will be to identify the right IRA provider.

1Select an IRA provider

Unlike with an employer-sponsored retirement plan, you can choose where you open and manage your IRA. There are many options, including traditional banks, online brokers, credit unions and investment companies. The following questions may help you identify the best fit for your needs.

Does my IRA need to be managed?

Before choosing an IRA provider, think carefully about how involved you'd like to be. In general, you'll have three options.

• Do-it-yourself investing: Self-managed IRA investing involves choosing, buying and managing your investments on your own. This option may be appealing if you're an experienced investor with a solid understanding of how different assets may impact your portfolio's performance.
• Professionally managed investing: With a managed IRA, a financial advisor will personally select and manage your IRA investments on your behalf. This may be ideal if you're seeking personalized recommendations and guidance to help you reach your financial goals.
• Robo-advisors: These online platforms use algorithms to recommend IRA investments based on your goals and risk tolerance. This option may be a good fit if you don't require the bells and whistles associated with a managed IRA but would still like some guidance.

Is there a minimum amount needed to open an IRA?

While some IRA providers do set minimums, there are many others that have no opening balance requirements. If you're starting off with a modest balance, you may wish to focus your search on these providers.

What IRA investment options are available?

Different financial institutions offer varying investment opportunities. Before opening an IRA, make sure your provider's offerings align with your investment goals. Depending on your priorities, you may find that having access to a full range of asset classes is important.

What fees will I pay for an IRA?

High fees can eat into your retirement savings, so look for a provider that offers low or zero account fees and commissions on trades. Be aware that mutual funds typically charge ongoing fees called expense ratios, which you'll need to factor into your cost-benefit analysis.

2Choose a traditional or Roth IRA

Your next step will be to choose between a traditional IRA and a Roth IRA—a decision that hinges primarily on whether you want your tax benefits now or later.

Traditional IRAs offer current-year tax benefits, allowing eligible savers to deduct their contributions each year. Your earnings will grow tax-free in the account until you're eligible to take penalty-free distributions, starting at age 59 1/2, which will then be taxed as regular income.

Roth IRAs are funded with after-tax dollars. While they don't provide immediate tax benefits, you'll enjoy tax-exempt growth over the years and can take tax-free withdrawals in retirement, which may save you money down the line.

Be aware that IRS income limits determine who's eligible to contribute to a Roth IRA. For example, in 2024 your modified adjusted gross income, or MAGI, must be less than $161,000 as a single tax filer or $240,000 if you're married and filing jointly. If your MAGI exceeds these limits, then a traditional IRA may be a better option.

3Open your IRA

Once you've selected a provider and know which type of IRA you want to choose, you're ready to open an IRA. The process might differ slightly depending on where you've chosen to open your account, but generally you can expect to provide some basic personal information and designate beneficiaries for your IRA.

4Fund your IRA

Funding an IRA is often done by transferring funds from a connected or external bank account. You can also transfer assets from an IRA that's held at another financial institution, or you can roll over funds from a 401(k) or another employer-sponsored plan into your new retirement account.

How much can you contribute to an IRA?

IRA contribution limits are updated each year—currently set at $7,000, or $8,000 if you're 50 or older in 2024. This maximum dollar amount restricts how much you can invest each year and applies to both Roth and traditional IRAs. Rollovers from an employer-based plan aren't subject to these limits, though, so you may transfer more than the set limit from an existing account into an IRA.

Calculate your IRA contributions to determine how much a single lump-sum amount will be worth by retirement in your traditional or Roth IRA.

5Choose your IRA investments

Once you've funded your IRA, it's time to put that money to work by choosing investments that match your goals and risk tolerance. Many financial institutions have a variety of stocks, bonds, mutual funds and exchange-traded funds you can invest in.

The bottom line

IRAs offer tax advantages and a diversified range of investment options, making them a powerful component of any retirement savings strategy. Depending on your income, you have the option to choose how and when you take advantage of the valuable tax breaks these accounts offer.