How to open an IRA: 4 easy steps

Opening a traditional or Roth IRA is one of the best things you can do to boost your retirement savings. Both are vehicles for tax-free growth, but you’ll have to pay taxes on withdrawals from a traditional IRA during retirement, whereas retirement withdrawals from a Roth IRA are tax-free. However, traditional IRA contributions may earn you a tax break in the year they’re made, while Roth IRA contributions are made with after-tax dollars.

Check out Bankrate’s guide to opening a Roth IRA here, or if you’re looking to open a traditional IRA, here’s how to get started.

How to open an IRA

1. Choose between a broker and robo-advisor

One of the first decisions you’ll need to make when opening an IRA is whether you want to manage the account yourself or have a robo-advisor do it for you.

If you have some investment knowledge or enjoy researching different funds or strategies, managing the account yourself may be the best approach. You may also save on fees, since you can open an IRA at most online brokers at no cost.

But many people may not feel comfortable selecting investments for their IRA on their own. Robo-advisors will build a portfolio based on your goals and risk tolerance and also offer other key features such as automatic rebalancing and tax-loss harvesting. You’ll typically pay an annual fee for these services, but the cost is often about 0.25 percent of your portfolio, much less than what you’d pay for a traditional advisor.

2. Open an account at your firm of choice

The next step for opening an IRA is to choose where to open your account. You can open an IRA at a variety of places, such as mutual fund companies, brokerage firms, robo-advisors or financial planning firms.

When you’re evaluating the different options, you’ll want to pay special attention to the fees you might have to pay, how easy it is to transfer money to the account and the types of investments that will be available to you.

Look for firms that offer low-cost trading and give you access to no-transaction-fee mutual funds. Keep an eye out for potential red flags like annual account fees, transfer fees and high initial investment requirements.

Most people will be best off opening an IRA at an online broker or robo-advisor because of the low fees and investment options available. Bankrate offers reviews of the top brokers and robo-advisors to help you choose which one might be the best fit for you.

3. Fund your IRA

Once you’ve opened your account, the next step is to fund your IRA. You typically have two options for funding a new account: transferring funds electronically or mailing a physical check. The electronic option is likely the quickest and should have your money available within a couple of business days. 

The amount of money you can contribute to an IRA each year is limited to $7,000 in 2024 and 2025. Those age 50 and older can contribute an additional $1,000.

You can also fund your IRA by rolling over money from a previous employer’s retirement plan such as a 401(k) plan. Bankrate’s 401(k) rollover guide can help you through the process.

4. Purchase investments in your IRA

It’s important to remember that an IRA isn’t an investment in and of itself. Rather, it is a tax-advantaged account in which you can buy and sell investments.

If you’re using a robo-advisor, your portfolio will be built using exchange-traded funds (ETFs) that are selected based on your goals and risk tolerance. Pay attention to the funds that are selected and make sure you aren’t paying expense ratios that are too high. A low-cost portfolio should come with fund expense ratios of around 0.10 percent or less.

If you’re managing your IRA yourself, you’ll likely build a portfolio using ETFs and mutual funds. Index funds are some of the best options because of their diversification benefits and low costs. They also tend to outperform actively managed funds over the long term.

FAQs

• How much money is needed to open an IRA?

  The investment minimums to open an IRA can vary by firm, but most online brokers and robo-advisors have no minimums to open an IRA. The annual contribution limit for 2024 and 2025 is $7,000, but those age 50 and older can contribute an additional $1,000.

  It’s worth noting that contributions can’t exceed the lesser of your earned income during the year or the annual IRS limits. You can make contributions for the previous year up until Tax Day of the following year. For example, you can make 2024 contributions up until Tax Day in 2025.

• What’s the best way to invest in an IRA?

  You have a lot of investment choices when it comes to an IRA. You can hold ETFs and mutual funds, as well as individual stocks or bonds. One of the best ways to invest for the long term is by holding low-cost index funds that track broad stock market indexes such as the S&P 500. These funds offer diversification at a low cost and have returned around 10 percent annually over the long term.

• Is an IRA a good investment?

  An IRA is one of the best vehicles for saving for retirement, but the account itself is not an investment. It may help to think of it like a wrapper that goes around your investments and shields them from having to pay taxes until you start making withdrawals during retirement.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.