In this article:
- 1. Select a Type of IRA
- 2. Choose an IRA Provider
- 3. Open an Account
- 4. Fund Your IRA
- Frequently Asked Questions
- Additional Ways to Invest for Retirement
Opening an individual retirement account (IRA) is as simple as choosing an account type, finding a provider, opening an account and transferring in your funds. Opening an IRA is your first step toward independently funding your retirement while taking advantage of tax benefits to maximize growth.
IRAs are fundamental to retirement savings: More than 4 in 10 U.S. households have one, according to a 2023 study from the Investment Company Institute. If you're ready to get started, follow these four simple steps to open an IRA of your own.
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1. Select a Type of IRA
Choose the type of IRA you want to open by comparing tax benefits, eligibility requirements and contribution limits. Here are four common IRA types to consider.
Traditional IRA
A traditional IRA lets you deduct contributions from your taxable income now, and defer taxes on gains while money grows in your account. When you withdraw money in retirement, your entire distribution is taxed as ordinary income. With a few exceptions, early withdrawals (before age 59½) may incur a 10% early withdrawal penalty. Contributions to traditional IRAs have an annual limit: In 2024, contributions are limited to $7,000 with an additional $1,000 catch-up contribution if you're age 50 or older.
Roth IRA
While contributions to a Roth IRA aren't tax-deductible, earnings and withdrawals are tax-free. There are restrictions and a 10% early withdrawal penalty when you withdraw your earnings or gains, but with a Roth you can withdraw your contributions at any time, penalty-free. Roth IRAs are subject to the same annual contribution limits as traditional IRAs. To contribute to a Roth, you must also meet IRS income requirements.
SEP IRA
A simplified employee pension (SEP) IRA is for small business owners and their employees, as well as self-employed people who operate solo businesses or do gig work. SEP IRAs are taxed like traditional IRAs, but they have higher contribution limits that can make them a better stand-in for 401(k)s and other employer-based pension plans.
SIMPLE IRA
Savings incentive match plans for employees, or SIMPLE IRAs, enable business owners with up to 100 employees to offer tax-advantaged retirement plans with higher annual contribution limits than traditional or Roth IRAs. Employers have the option of matching employee contributions or providing non-elective contributions to incentivize employees to save more toward retirement.
2. Choose an IRA Provider
You can open an IRA with any number of providers, including brokerages, banks, credit unions, mutual fund companies and more. If you're already working with a financial advisor, bank or brokerage, you may want to start there. If you're starting from scratch, consider these three easy choices for opening an IRA.
Online Broker
Online brokerages give you access to a range of IRA choices and a world of investment types, including mutual funds and exchange-traded funds (ETFs) with low or no commissions. If you choose to work with an online broker, you'll select your own investments. You have the flexibility to change or adjust your investment choices whenever you like. Look for an online broker that charges minimal transaction and account fees.
Robo-Advisor
If you like a self-service approach to managing your IRA, but you'd like help selecting and managing investments, a robo-advisor might be an option to consider. Robo-advisors are automated investment platforms that select a mix of investments based on your goals, time horizon and risk tolerance. A robo-advisor can also adjust or rebalance your account periodically to ensure your portfolio stays on track.
Bank or Credit Union
You can also open a traditional or Roth IRA at any bank or credit union. These financial institutions typically offer IRA savings accounts, which may include IRA CDs or retirement savings. Some banks and credit unions also have investment services that may be able to help you open and manage an IRA investment account: Check with your financial institution to learn more about these options.
3. Open an Account
Opening a traditional or Roth IRA is simple: Choose your provider and complete the account forms online. You'll need basic personal information, including your full name and address, Social Security number, date of birth and employment.
How to Open a SEP IRA or SIMPLE IRA
To open a SEP or SIMPLE IRA, you'll need to meet additional IRS requirements. Because your SEP or SIMPLE plan is essentially a company benefit, you need to ensure that it's set up to accommodate employees. Here are the basic steps.
- Adopt a formal written agreement. The IRS provides model agreements you can complete and sign: Use Form 5304-SIMPLE or Form 5305-SIMPLE for a SIMPLE plan, or Form 5305-SEP for a SEP. You can also use an agreement from your IRA provider, or one you create yourself.
- Provide each eligible employee with plan information.
- Set up an IRA account for each employee.
4. Fund Your IRA
Once your account is open, you have a few strategies to consider for funding your account. Whether or not your IRA provider requires a minimum opening balance, you may want to start your account with a lump sum: cash from savings, part of your annual bonus or money you've earmarked for retirement. Here are a few additional ways to grow your IRA.
- Roll over funds from another IRA or retirement account. If you have another IRA or a 401(k) or other retirement plan with a previous employer, you can usually arrange an electronic IRA rollover from your old account directly into your new one. Alternatively, make sure you maintain a paper trail that shows where the money came from, how much was withdrawn and the amount deposited into your new IRA (which should equal the amount withdrawn). Documenting these moves will prevent confusion at tax time.
- Set up regular automatic contributions. Calculate how much you'd like to contribute annually and divide it by the number of contributions you plan to make in a year. Automatic contributions can make it easier to save consistently toward retirement, and they save you the trouble of doing manual transactions.
IRA Contribution Limits
You want to maximize your retirement contributions, if possible, but you don't want to over-contribute. Contributing too much to your IRA could lead to mandatory withdrawals and IRS penalties. Each type of IRA has its own annual contribution limit. Here are the limits for 2024, including catch-up contributions if you're over 50.
| 2024 IRA Contribution Limits by Type | ||
|---|---|---|
| Contribution Limit | Catch-Up Contribution Limit | |
| Traditional IRA | $7,000 | $1,000 |
| Roth IRA | $7,000 | $1,000 |
| SEP IRA | $69,000 or 25% of compensation (whichever is less) | None |
| SIMPLE IRA | $16,000 | $3,500 |
Source: IRS
Roth IRA Income Limits
To contribute to a Roth IRA, you'll need to meet IRS income requirements. For each tax filing status, the IRS has a phase-out range that gradually reduces the amount you're eligible to contribute to a Roth until your eligible contribution reaches zero. Here are the income ranges for 2024.
| Roth Income Limits for 2024 | ||
|---|---|---|
| Filing Status | 2024 Income | Amount You Can Contribute |
| Single, head of household or married filing separately (and you didn't live with your spouse at any point during the year) | Less than $146,000 | Up to the maximum ($7,000; $8,000 if you are 50 or older) |
| $146,000 to $161,000 | A reduced amount | |
| $161,000 or more | Zero | |
| Married filing jointly or qualified widow(er) | Less than $230,000 | Up to the maximum ($7,000 per person; $8,000 if you are 50 or older) |
| $230,000 to $240,000 | A reduced amount | |
| $240,000 or more | Zero | |
| Married filing separately | Less than $10,000 | A reduced amount |
| $10,000 or more | Zero |
Source: IRS
Frequently Asked Questions
How Much Does It Cost to Open an IRA?
Most IRAs don't charge setup fees to open an account. However, there are fees you'll want to keep in mind if you're planning to open an IRA, including transaction fees or commissions, advisory fees and expense ratio fees on funds.
Before you choose a provider, check their fee schedule and look for ways to work around these expenses when you can. You may be able to avoid account fees by maintaining a certain balance, for example.
What's the Minimum Amount to Open an IRA?
Minimum opening deposit requirements can vary from one provider to another, but these requirements are typically low—or even zero. Making it easy encourages you to open an IRA account, so you can start saving toward retirement even if it means starting small. It also enables you to open a rollover IRA account and fund it later with funds from an old 401(k) or neglected IRA.
Additional Ways to Invest for Retirement
IRAs are among the most common vehicles for retirement investing. However, they aren't the only game in town. Here are a few alternatives to consider.
- Employer-based plans: Contributing to a 401(k) or 403(b) plan through your work can be a great way to save for retirement. Employer-based plans have higher contribution limits than traditional or Roth IRAs: $23,000 for 2024 with a $7,500 catch-up contribution. Some employers provide matching dollars for retirement plan contributions, which can help you save more money, faster.
- Taxable brokerage account: Although investing through a tax-advantaged IRA can save you money on income taxes and capital gains taxes, adding a taxable brokerage account gives you the flexibility to invest additional funds in stocks, bonds, mutual funds, ETFs, cryptocurrency or whatever other investments you like.
- Annuities: An annuity isn't like other types of investments; it's a contract between you and an insurance company. An annuity can help you convert your savings into a guaranteed payout or series of payments over time, including (in some cases) payments for the rest of your life.
- High-yield savings accounts: While investing in stocks, bonds or funds can help your retirement savings keep up with (or beat) inflation, putting some money in a high-yield savings account can keep it safe while earning a higher return than you would get with a regular savings account. Check your options at banks, credit unions and online banks.
- Certificates of deposit (CDs): CDs are time-limited savings accounts that lock in a relatively high rate of interest in exchange for your agreement to leave the money in your account for a specified time—typically six months to five years.
- Money market accounts: A money market account combines a relatively high interest rate with limited check-writing or debit transactions. A money market account can be a great place to accumulate funds you plan to contribute to your IRA—or eventually spend in retirement.
The Bottom Line
Choosing, opening and funding an IRA account (or two) takes a bit of research and initiative, but the benefits you receive may go well beyond the dollars you deposit. With a 5% average annual return, a $7,000 investment today could be worth $51,509 in 40 years, even if you never contribute another dime. Then again, once you've opened accounts and set up funding, it's easy to continue growing your savings—and bringing your retirement goals closer every day.
