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- You can open an IRA, a type of a tax-advantaged investment account, at almost any financial institution.
- Not all IRAs are alike, so be sure to compare minimum deposit requirements, account fees, trading fees, and investment options.
- Some IRAs are free to open, but once you have an active account, you need to fund it and choose your investments.
- In 2019, you can contribute up to a total of $6,000 to a traditional IRA and Roth IRA, plus an extra $1,000 if you’re over age 50.
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Most financial experts recommend first funding an employer-sponsored retirement plan such as a 401(k), which allows employees to make automatic, pretax deferrals from their paycheck directly into an investment account.
If you’ve contributed, or plan to contribute, the annual maximum of $19,000 to your workplace plan this year; are contributing enough to get an employer match; want to invest in funds or stocks not available through your 401(k); or don’t have access to a workplace retirement plan at all, it’s probably time to open an IRA.
IRAs are a type of individual retirement account operated by banks and brokerages, rather than your employer, and mainly come in two forms — traditional and Roth. The only difference between the two is tax treatment.
Contributions to a traditional IRA are tax deductible, while contributions to a Roth IRA are not. Each year you put money into an IRA, you can deduct that amount (up to the federal limit of $6,000 in 2019) on your tax return, lowering your overall tax bill.
At age 59 and a half, you can can begin withdrawing funds from an IRA and it will be taxed as ordinary income. The money put into a Roth IRA, by contrast, has already been taxed as income and cannot be listed as a deduction on your tax return — it grows tax-free and can be withdrawn tax free once you reach age 59 and a half.
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You don’t need to choose between a 401(k) and an IRA. In fact, most people benefit from having both. Keep in mind, though, that if you are an active participant in your workplace retirement plan and earn above a specified amount, your ability to score a tax break on traditional IRA contributions may be limited.
How to open an IRA
1. Set your goal
Before you even shop for an IRA, identify your objective.
Are you looking for a place to put away more money for retirement after maxing out your 401(k)? Do you want investments not offered in your 401(k) — if yes, what specifically? Will you actively trade stocks and bonds, or set and forget your investments?
There are dozens of IRAs that will satisfy almost any type of investor, so make it clear what your purpose is before shopping around. The “best” IRA will depend on your specific financial goals, which can be as a simple as “I want to multiply my money and pay minimal fees.”
You don’t need to decide up front whether you want a traditional or Roth IRA. Any bank or brokerage that’s offering IRAs has both, and the investment options and fees will be the same. But when the time comes to decide between traditional or Roth, consider this: Do you want to get a tax break on your IRA contributions this year or do you want to withdraw your money tax-free in retirement?
2. Compare investment options and fees
You can open an IRA at almost any financial institution. It may be convenient to open an IRA where you already bank or invest, but don’t take the plunge before comparing investment options and fees.
Again, the goal(s) you established will guide you here. If you want to set and forget your investments, look for an IRA with low-cost index funds and target-date funds — this is where industry stalwarts like Vanguard and robo-advisors like Betterment and Wealthfront excel. If you don’t have any money to invest yet, look for an IRA with no minimum deposit requirement where you can set up automatic transfers.
Generally, you want to look for:
- low (or no) account maintenance, closure, and transfer fees
- a low (or no) minimum deposit requirement
- a variety of investment options, including mutual funds, ETFs, stocks, bonds, and CDs
- expense ratios below 1%
- individual trade fees below $7
- commission-free funds
3. Complete an application online or by phone
Once you choose the IRA you want, you’ll have to complete a brief application, either online or by phone. At the very least, you’ll be asked for your birthdate, Social Security number, and your bank routing and account numbers.
If you choose a robo-advisor, the set-up process will also include some questions about your financial goals and risk level so it can create a custom investment portfolio for you.
4. Establish a beneficiary
You’ll also need to name a beneficiary — the person who would inherit your IRA in the event of your death. It can be changed later if needed.
5. Fund the account
Even if you’re able to open an IRA with no minimum deposit, you still need to fund the account in order to pick your investments. You should have provided your bank account information during the application process, which you can use to set up a one-time transfer or regular, automatic transfers.
In 2019, you can contribute up to $6,000 to an IRA — traditional and Roth, combined — plus an extra $1,000 if you’re over age 50. Remember that your ability to deduct your traditional IRA contributions on your tax return, and how much, depend on whether you participate in a workplace retirement plan and your income. The IRS website outlines the limits.
6. Choose your investments
Once your IRA is set up and there’s money in your account, you need to decide what to invest in. Your portfolio can be as complicated or simple as you want it to be.
Generally, you want to ensure your investments are diverse across, and within, stocks and bonds — not just in your IRA but across all your investment accounts, including your 401(k) or other workplace retirement plan. This can get complicated if you’re choosing individual stocks or bonds, so most financial experts recommend choosing an all-in-one fund, like an index fund or target-date fund, that’s designed to be diverse and minimize risk.
Target-date funds automatically choose a blend of investments based on your age — the younger you are, the riskier the investments (more stocks). As you approach retirement age, they become more conservative (less stocks).
Index funds track an entire “index,” or selection, of stocks or bonds. One of the biggest index funds, Vanguard’s Total Stock Market Index Fund, tracks a large selection of stocks from large, mid-sized, and small companies.
7. Set up automatic contributions
To meet the the maximum contribution limit of $6,000 (or $7,000 if you’re over 50) in 2019, you may want to set up automatic transfers to your IRA, which you can do online or by phone with your provider. The money will be transferred from your choice bank account into your IRA, but you’ll still have to direct the money toward specific investments once it’s in there.
8. Check your account no more than once a quarter
If you choose a fund that automatically rebalances itself, you won’t have to do much maintenance, especially if you go with a robo-advisor. If you funded your account upfront and won’t be making automatic transfers, you probably don’t need to check your account more than once a quarter.