How to Open an IRA: Beginners Guide
Saving for retirement may be the biggest financial goal many of us will ever set. So it makes sense to explore all retirement savings options, including an IRA, or individual retirement account. The sooner you open your first IRA, the more opportunity your savings have to grow over time, potentially leading to a nice nest egg upon retirement.
There are other benefits to opening an IRA. For one, it can deliver attractive tax perks — either up front or in retirement — and it can be especially attractive to individuals who don’t have an employer-sponsored 401(k) plan, or have maxed it out already.
This article will walk you through the steps of opening an IRA — whether a traditional, Roth, or SEP IRA.
How to Open an IRA in 5 Steps
1. Choose What Type of IRA Is Best for You
Of the several types of IRAs that exist, traditional and Roth IRAs are the most common. Both allow you to put a certain amount toward retirement each year and invest in an array of assets.
When it comes to choosing between a traditional IRA vs. Roth IRA, it helps to know their key differences.
If you earn a taxable income, you can open a traditional IRA regardless of how much you make per year. An IRA can be a good next step if you’ve maxed out your 401(k), for instance.
One notable difference between traditional and Roth IRA accounts is that traditional IRAs allow you to deduct your contributions on your tax returns now, meaning you pay taxes on distributions when you retire. You’ll pay a 10% penalty tax (in addition to regular income tax) on any money you withdraw from a traditional IRA before age 59 ½, with a few exceptions.
It may be better to go with a traditional IRA if you think you’ll be in a lower tax bracket after retirement. This is because you’ll be saving on a higher tax rate now (vs. the lower rate you’d be paying later, since you’d be in a lower tax bracket in retirement).
Unlike traditional IRAs, there are income limits on who can open a Roth IRA. For 2023, individuals can only contribute the full amount — $6,500, with an additional $1,000 for people age 50 or over — to a Roth IRA if their income is below $138,000 for single filers. Those earning more than $138,000 but less than $153,000 can contribute a reduced amount. For married people who file taxes jointly, the limit is $218,000; those who earn up to $228,000 can contribute a reduced amount.
Roth IRA contributions are made with after-tax income. While that doesn’t offer any tax advantages now, it does mean that when you withdraw money upon retirement, you won’t have to pay taxes on it. As such, a Roth IRA may make sense for eligible individuals who typically get a tax refund and expect to be in a similar or higher tax bracket when they retire (for example, if they plan to have substantial income from a business, investments, or work).
💡 Still confused? Consult our Roth IRA Calculator for help deciding which account may be right for you.
With the number of self-employed workers on the rise, it’s worth mentioning that there’s a third type of IRA that may be worth considering: a SEP IRA. A SEP IRA, or simplified employee pension, can be set up by either an employer at a small business or by someone who is self-employed.
Employers get a tax deduction when they contribute to their employees’ IRAs, and they’re also allowed to contribute on a “discretionary basis” (meaning the employer doesn’t have to contribute in years where it’s not as financially feasible for the company.)
For employees, this option may allow you to contribute a greater amount than other IRAs, depending on your income.
💡 Recommended: What Is an IRA CD?
2. Choose Where to Open Your IRA
You can open an IRA at a bank, a brokerage, mutual fund company, or other financial services provider. Typically, the more personal care and advice you get, the higher the fees will be. A robo-adviser, for instance, might charge lower fees than a brokerage.
SoFi Invest® streamlines the process of opening an IRA online, allowing investors to transfer money from their bank electronically.
3. Open Your Individual Retirement Account
Once you decide where to open an IRA, you’ll need to follow through with doing so. The process for how to open an IRA can vary a bit from provider to provider, but it’s generally pretty straightforward. You’ll typically need to provide information such as:
• A copy of your government-issued ID
• Personal information, including contact information and Social Security number
• Details on intended beneficiaries
Once your account is opened, you’ll receive guidance on funding an IRA. If you want to fund your account through an electronic transfer, you’ll be asked to provide banking information. It’s also possible to roll over existing retirement accounts — and yes, it is possible to open an IRA if you have a 401(k) already.
Rolling Over a 401(k) into an IRA
If you’re leaving a job with an employee-sponsored retirement plan, you can roll over your 401(k) into a traditional IRA. Doing so can potentially allow you to access better investment options and lower fees.
When you roll money over from a 401(k), there’s no limit to how much you can add to an IRA at that time. Going forward, additional contributions will be capped at the typical IRA contribution limit.
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4. Choose a Contribution Amount
As of 2023, you can contribute up to $6,500 a year to a traditional or Roth IRA, or up to $7,500 if you’re 50 or older. If you take home more than the maximum earnings allowed for a Roth IRA but still prefer a Roth IRA over a traditional account, you might be able to contribute a reduced amount of Roth IRA contribution limits.
In many cases, it’s a good idea to invest as much as you can up to that amount each year to take full advantage of the power of compound interest.
A retirement calculator can help you figure out whether you’re on track for retirement. A quick rule of thumb: By the time you’re 30, it’s typically good to have the equivalent of one year’s salary saved.
5. Decide Where To Invest Your Funds
Investors can choose to invest in stocks, bonds, mutual funds, low-cost index funds, or exchange-traded funds (ETFs) — or a combination thereof.
One popular type of investment fund geared toward retirement savings is a “target date fund.” A target date fund is calibrated to the year you plan to retire, and it’s meant to automatically update your mix of assets, like stocks and bonds, so they’re more aggressive earlier in life and more conservative as you approach retirement.
Ultimately, the mix of investments in your IRA should depend on your personal risk tolerance, lifestyle, and retirement goals.
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Start saving today with a Roth or Traditional IRA.
Pros and Cons of IRAs
If you’re contemplating whether to open an IRA, it’s important to understand the pros and cons of this category of retirement account. Here’s a look at the pros and cons of traditional and Roth IRAs, two of the most common types of IRAs:
|Tax-advantaged saving||Lower contributions limits than other types of retirement accounts|
|Anyone can open one||Income limits on contributions/ deductions|
|Wider array of investment options||No employer matching contributions|
|Easy to set up||Have to set it up yourself|
Investing in Your Retirement
Once you’re familiar with how to open an IRA account, the process itself is pretty straightforward — possibly the biggest lift involved is deciding which IRA suits your personal situation and retirement goals best: a traditional, Roth, or SEP IRA. From there, you’ll need to decide where to start a Roth IRA or other type or IRA, then go through the formal process of starting an IRA, which includes providing certain information, funding the account, selecting a contribution amount, and deciding where to invest your funds.
That can all sound like a lot, but getting started on saving for your retirement doesn’t have to be difficult. SoFi Invest makes opening an IRA simple — it’s possible to sign up in less than five minutes. You can be as involved in the investment process as you want to be — either with hands-on investing or our automated investing technology, in which our algorithm will recommend an appropriate mix of investments based on your age and retirement goals.
How much money is required to open an IRA?
There’s no universal minimum amount required to open an IRA. That being said, some providers will have minimum requirements.
Can you open an IRA all on your own?
Yes, it’s definitely possible to open an IRA on your own. The process is simple, similar to opening a bank account, and you can do so at most banks, brokerages, or other financial institutions. Often, it’s possible to start an IRA online.
Can you open an IRA at a bank?
Yes, many banks offer IRAs. You can also open an IRA at credit unions, brokerages, and investment companies.
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