How to Open an IRA: Retirement Guide

An individual retirement account, or IRA, is a popular tool that’s used to help build your retirement savings. IRAs are tax-advantaged accounts, and they offer direct access to investments. There are four important steps to follow when opening an IRA. These include figuring out what type of IRA is best for your situation, where to open your account, how to fund it and what to invest your money in. If you have specific questions about IRAs or retirement planning, consider meeting with a financial advisor in your area.

1. Deciding What Type of IRA Is Best for You

Generally speaking, you have two basic options when it comes to IRAs: a traditional IRA or a Roth IRA. The annual contribution limits for each of these accounts are the same. For 2023, the IRS caps IRA contributions at $6,500, though account holders age 50 and up have a slightly higher limit of $7,500. When it comes to taxes, traditional and Roth account contributions are treated very differently.

With a traditional IRA, your contributions may be partially or fully tax-deductible. This is dependent on your income level, filing status and whether or not you have an employer retirement plan.

In 2023, taxpayers earning over $83,000 (up from $78,000 in 2022), and married joint filers with a workplace retirement plan making more than $136,000 (up from $129,000 in 2022), cannot deduct contributions.

But while you could qualify for a tax deduction up front, when time comes to withdraw from your traditional IRA in retirement, you’ll have to pay income taxes.

On the other hand, the assets in a Roth IRA grow tax-free. This is because Roth IRAs are funded with after-tax dollars. That means account holders will have already paid taxes on the money they deposit in the account. Though they will have to wait until age 59 1/2 or hold the account for five years to make a withdrawal without a penalty (those using the money to buy a first-time home and pay for college, birth or adoption could be exempt).

You should also note that Roth IRAs have income limits that determine contribution eligibility. Individual taxpayers opening a Roth account in 2023 cannot earn more than $153,000 (up from $144,000 in 2022). This limit goes up to $228,000 for married couples filing jointly (up from $214,000 in 2022).

Summing up, if you’re young and expect to be in a higher tax bracket in retirement, opening a Roth IRA may be smart. But for anyone with a high-paying job who expects their income to decrease in retirement, investing in a traditional IRA (even when you cannot deduct any or part of your contributions) likely makes more sense as your money will continue to grow tax-free until you retire.

2. Choosing Where to Open Your IRA

You can open an IRA at most banks, credit unions and other financial institutions. However, IRAs are also available through online brokers, mutual fund providers and other investment companies, such as Vanguard and Fidelity. Each of these options has its respective benefits and downsides.

If you are a hands-on investor, you may want to open an IRA through an online brokerage. A brokerage could help you generate strong returns, but for this growth, you’ll need to choose investments and manage your portfolio. When selecting a brokerage to work with, consider trading fees and minimums, as well as the quality and usability of their online and mobile platforms. Fees are especially important, as any charges will directly affect your retirement funds.

You may also consider working with a robo-advisor if you are a hands-off investor. Just like with a brokerage, compare fees and services to make sure your needs are met. Many robo-advisors rebalance portfolios and allocate assets to balance risks and rewards automatically. Others, however, may also give you access to a financial advisor.

If you set up an IRA at a bank or credit union, your account will probably take the form of an IRA CD. CDs, or certificates of deposit, often have lower yields than investments. On the bright side, though, they allow you to minimize risk by guaranteeing your rate of return over time.

3. Opening and Funding Your IRA

Once you choose which IRA provider you want to work with, go to the company’s website to start the application process. Some companies may offer branch access, but online services can often be easier to initiate transfers through. These applications will ask for certain personal information, like your full name, address, Social Security number, email and more.

If you’re transferring funds from your own savings or checking account, you’ll need to provide your bank’s routing number and your account number. But if you’re funding your account through a 401(k) rollover, you’ll instead need to list your company’s name and address, as well as the manager of your 401(k). You can also transfer money from another IRA, in which case the provider will ask for that account’s information.

Remember that the IRS limits how much you can contribute to an IRA. For 2023, the IRA contribution limit is $6,500, and the catch-up contribution limit for those 50 or older is $7,500. Note that 401(k) rollovers do not count against these limits.

4. Investing the Assets in Your IRA

Opening an IRA at a bank involves very little decision-making, as you can simply go for the best CD rates and terms you can find. If the possibly stronger returns of a brokerage-based IRA intrigue you, be ready to make some further decisions.

After your IRA is ready, the final thing to do is choose your investments. More specifically, you’ll need to select from an array of mutual funds, bonds, stocks, exchange-traded funds (ETFs) and more. Those nearing retirement often stick to bonds, ETFs and cash allocations, whereas anyone who’s a ways away from retiring can afford to be riskier in the interest of higher returns.

If you’re new to investing, mutual funds and ETFs tend to be the simplest options. A mutual fund typically holds a pool of assets, including stocks, bonds and money market funds. ETFs work similarly, only they tend to focus on specific risk tolerances and market sectors. Both are professionally managed for you when you buy into them.

While you’re more than welcome to manage your own IRA investment portfolio, it might be worthwhile to have a financial advisor help you. Advisors can also aid you in building a long-term financial plan that covers things like college savings, estate planning, tax planning and more.

Why Opening an IRA Is Important

Many people may believe that a 401(k) or a high-yield savings account is more than enough when saving for retirement. Although you may be able to get away with that, an IRA can make things a lot easier.

For starters, your IRA will be your own personal account that features a much wider range of investment opportunities than a 401(k) typically does. That’s because 401(k)s often focus on target-date funds, which take a lot of the decision-making out of investing. If you’re looking to maximize your earnings, an IRA is probably your best bet.

However, that’s not to say that you shouldn’t open a 401(k) with your employer if they offer it. 401(k)s are extremely valuable too, as they also receive tax benefits and many employers will provide employees with matching contributions up to a cap. Just as you diversify your investments, you should be diversifying your retirement funds across multiple accounts.

Savings accounts have their place as well. While 401(k)s and IRAs are generally low-risk, they technically aren’t as safe as an interest savings account or certificate of deposit (CD). In the end, though, all three of these accounts should be a part of your retirement savings portfolio.

Bottom Line

Saving for retirement is one of the most important things you’ll ever do. After all, the funds you accrue before you retire will take care of you and your partner for the rest of your lives. So don’t be afraid to spend some time picking the type of IRA and IRA provider that’s best for your needs. In addition, try to contribute as much as you can to your retirement accounts. In the end, that’ll only boost your potential returns.

Retirement Planning Tips

Managing your IRA can be tough on your own, so don’t be afraid to ask for some professional help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Although Social Security won’t cover all of your retirement expenses, it can be a valuable addition to your income stream. There are many factors to take into account when it comes to planning when you’ll begin taking payments. SmartAsset’s Social Security calculator is a great place to start your planning process.
An IRA gives account holders maximum flexibility, as you can manage these accounts on your own. However, this benefit shouldn’t keep you from utilizing other retirement savings accounts, like a 401(k). 401(k)s are usually available through your employer, with some employers even offering matching contributions.