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 just a few steps.

Who can open an IRA?

Anyone who has earned income during the year can make contributions to a traditional or Roth IRA, although Roth accounts have income limits.

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

• Do-it-yourself investing: Self-directed 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 guided investing 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 personalized attention associated with a managed IRA but would still like some guidance.

How much do I need to open an IRA?

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

What IRA investment options are available?

Different financial institutions offer varying IRA 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 erode your retirement savings, so look for a provider that offers low or no account fees and commissions on trades. Be aware that mutual funds typically charge ongoing fees called expense ratios, which you'll need to factor in to your cost-benefit analysis.

2Choose a traditional or Roth IRA

Your next step will be choosing between a traditional and 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 you to deduct your 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. Your distributions 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 get 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 the ability to contribute to a Roth IRA may be limited based on your filing status and income.

3Open your IRA

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

4Fund your IRA

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

Rollover IRAs are often a good solution if you're deciding what to do with an old 401(k) or 403(b), particularly when compared to other options like leaving the money in an old employer plan, transferring it to a new workplace plan or withdrawing the funds.

How much can you contribute to an IRA?

IRA contribution limits are updated each year. This maximum 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 can transfer more than the set limit from an existing account into an IRA.

You can calculate your IRA contributions to determine how much a 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 this money to work by choosing IRA 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.

Additional IRA considerations

Before opening an IRA, you may have a few practical questions about timing and restrictions. Here are answers to three common questions that can help you plan your next steps.

How long does it take to open an IRA?

Opening an IRA is typically a quick process that can be completed online in 10 to 15 minutes. Funding the account and selecting investments may take additional time, depending on your situation.

How old do you have to be to open an IRA?

There's no minimum age requirement to open an IRA, but you must have earned income to contribute. For minors, a parent or guardian typically opens and manages the account on their behalf.

Can you open an IRA after retirement?

You can open and contribute to an IRA after retirement as long as you have earned income. If you're no longer working, you may still be able to contribute based on a spouse's income. Even after you begin taking required minimum distributions from traditional IRAs, you can still contribute to a Roth IRA if you have earned income.

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.