How to Start an IRA

Want to open your first IRA? Here's your guide to getting your account open.

Christy Bieber
Christy Bieber
Jul 2, 2019 at 10:23PM
Investment Planning

IRAs, or Individual Retirement Arrangements, are accounts that provide tax benefits for retirement savings. You can open one in addition to contributing to a workplace 401(k), or you can use one to score tax breaks for retirement investing when you don't have a plan at work. 

While there are lots of advantages to opening an IRA, there are eligibility restrictions to be aware of. It can also be confusing to figure out where you should open your IRA or what you can do with it once you've got it. 

This guide will walk you through the steps of starting an IRA, which include:

  • Deciding what kind of IRA you want: Depending on your situation, you could invest in a traditional IRA, a Roth IRA, a SEP IRA, or a SIMPLE IRA.
  • Making sure you're eligible for tax breaks or IRA contributions: There are income limits in some situations. 
  • Deciding where to open your IRA: You could open an IRA with an online broker; a robo-advisor; a peer-to-peer lender; a bank; or other financial institutions. 
  • Completing the paperwork to open an IRA: You can usually fill out the paperwork online and get your account open within minutes. 
  • Funding your account: You can make an initial transfer of funds and may wish to set up automatic contributions.
  • Choosing your investments: You could put your money into stocks, bonds or mutual funds or buy other assets. 
Jar of coins labeled retirement with coins and clock sitting next to it.

Image source: Getty Images.

What kind of IRA should I open? 

The first thing to know about IRAs is that there are four kinds to choose between, depending on your situation. Options include the following: 

A traditional IRA. Traditional IRAs are simple accounts you can open whether you work for yourself or for an employer. If you don't have a workplace retirement plan, you can always get tax breaks for traditional IRA contributions in the year you put money into your account. If you or your spouse has a workplace plan, you may still be able to save on taxes for contributions, depending on income. 

There are annual limits to deductible contributions. For 2019, you're limited to claiming tax breaks on a maximum of $6,000 in contributions if you're under 50 and qualify for the full deduction. If you're over 50, you can make an additional $1,000 catch-up contribution. 

A Roth IRA. Roth IRAs can also be opened if you work for a company or are self-employed -- but they work differently. You put money into your Roth IRA with after-tax dollars but are allowed to withdraw money tax-free in retirement. 

There are also annual limits on contributions. In fact, the same annual limit applies to a traditional and Roth IRA, and it's an aggregate limit. You can contribute a total of $6,000 (or $7,000 with catch up contributions) to a Roth and/or Traditional IRA. You could put your entire contribution into a Roth IRA; the full amount into a traditional IRA; or some into each account. But you can't put $6,000 or $7,000 into a Roth IRA and another $6,000 or $7,000 into a traditional IRA.

A SIMPLE IRA. The "SIMPLE" stands for Savings Incentive Match Plan for Employees. You can invest in a SIMPLE IRA if your employer offers one or can open one for yourself if you're a sole proprietor or have your own business.   

Contribution limits for SIMPLE IRAs are higher than traditional or Roth IRAs. You can contribute up to $13,000 in 2019 and make additional catch-up contributions up to $3,000 if you're over 50. Contributions come out of your salary and are called salary reduction contributions. They can't exceed net earnings from self-employment from the business that created the plan. 

Employers also must contribute to a SIMPLE IRA for employees. If you're a sole proprietor or run a business, you're considered to be your own employer. Acting as an employer, you must either match salary reduction contributions on a dollar-for-dollar basis up to 3% of net earnings from self employment or must make a required contribution of 2% of net earnings from self-employment, up to a maximum of $280,000 in net earnings. 

A SEP IRA. "SEP" IRA stands for Simplified Employee Pension. You can establish a SEP if you're self-employed or run your own company, or an employer can establish one for you. 

Only employers can contribute to a SEP, and the maximum contribution for 2019 is the lesser of $56,000 or 25% of employee compensation up to $280,000. If you're self-employed, you can make contributions for yourself up to 25% of net earnings from self-employment or a maximum of $56,000. 

How to decide between a traditional and Roth IRA

If you have a traditional job and earn wages, you'll need to choose between a traditional and a Roth IRA or will need to split contributions among both accounts. To decide: 

  • Determine whether you need the tax break to help save: Taking a tax break when you make contributions means take-home income isn't reduced as much. If you're in the 22% tax bracket, a $6,000 contribution saves up to $1,320 on taxes, so take-home income is only reduced by $4,680. This makes saving easier and cheaper. But if you have plenty of cash to max out your IRA, you may be better off using a Roth and taking the tax break later.
  • Consider whether your tax rate will be lower in the future: If you think you'll be in a higher tax bracket at retirement, open a Roth. But, if you think you'll be in a lower tax bracket later, take the tax savings now at your current higher rate. 
  • Determine if you want to be required to take money out as a senior: If you contribute to a traditional IRA, you must begin taking required minimum distributions at 70 1/2. You don't have to do this with a Roth IRA. If you don't want to be forced to make withdrawals on a schedule set by the government, a Roth is a better choice. 

If you're self-employed, things get more complicated. SIMPLE and SEP IRAs are generally better because they offer higher contribution limits -- but choosing between them is hard. Look at which allows you to contribute the most and, if you have people working for you, whether you'll be required to contribute to their retirement accounts too. Often, it's best to talk with an accountant or other tax professional to help you choose. You can also check out our guide to choosing between a SIMPLE or SEP IRA

Am I eligible for tax breaks for IRA contributions?

There are income limits for both traditional and Roth IRAs. You can make non-deductible contributions to a traditional IRA if your income exceeds these levels, but you can't take a tax deduction. And if you exceed the maximum income level for a Roth IRA, you aren't allowed to contribute at all.  

Income limit for traditional IRAs: The following table shows income levels in 2019 at which your deduction for IRA contributions begins to phase out and the income level at which you lose your deduction entirely if you have access to a workplace retirement plan. 

Filing Status

If You Make Above This Income, Your Deduction Phases Out

If You Make Above This Income, You Lose Your Deduction

Single

$64,000

$74,000

Married filing jointly

$103,000

$123,000

Married filing separately

$0

$10,000

Data source: IRS.

If your spouse has access to a workplace retirement plan but you don't, this table shows the income level in 2019 at which your deduction begins to phase out and is lost. 

Filing Status

If You Make Above This Income, Your Deduction Phases Out

If You Make Above This Income, You Lose Your Deduction

Married filing jointly

$193,000

$203,000

Married filing separately

$0

$10,000

Data source: IRS.

Income limits for Roth IRAs: The following table shows how much you can make before your eligibility to contribute to a Roth IRA begins to phase out or is lost entirely. 

Filing Status

If You Make Above This Income, Your Eligibility Phases Out

If You Make Above This Income, You Can't Contribute to a Roth

Single

$122,000

$137,000

Married filing jointly

$193,000

$203,000

Married filing separately

$0

$10,000

Data source: IRS.

Where should I open an IRA? 

Once you know what kind of IRA you can open, decide where to open your account. Some of your options include the following:

Online brokerage firm: Online brokerage firms allow you to invest in a mix of assets, including stocks, bonds, mutual funds, and ETFs. Many online brokers allow you to open an IRA for free. To pick one, read our complete guide to how to choose an online brokerage. Essentially, you'll want to look for a broker that provides access to a mix of different investments and charges a low commission for buying and selling assets.

For most people, an online brokerage firm is the right choice. With an online broker, you have flexibility in what you can invest in and can get your money into the stock market -- which has consistently and reliably provided the best returns on investment over time with reasonable risk. 

Full-service broker: Full-service brokers also allow you to invest in a mix of different assets but manage money for you or provide more help in choosing investments. The big downside is that they're often very expensive. You may have to pay high commissions and management fees. Many also require a pretty high minimum balance.

Robo-advisors: Robo-advisors are relatively new to the financial scene. Essentially, you put your money into an account and answer a few simple questions, and a computer algorithm determines how to allocate your money. You don't have to select investments, so you can be very hands-off. But you'll pay a fee. While you pay less than you would with a full-service broker, even tiny fees can ravage your retirement savings.

Paying a robo-advisor may not be worth it, considering you don't really need one when you can easily build a diversified portfolio by investing in ETFs. Some of our model portfolios can help you get started. 

Peer-to-peer lending networks: Peer-to-peer lending networks allow you to invest in loans made to other people. You can choose loans based on parameters including the borrower's credit score and payment history. Many peer-to-peer networks also offer automated investing options, where your money is invested in a portfolio of loans for you. 

For most people, investing in the stock market makes more sense. But if you want an alternative investment and/or have a lot of money invested in stocks elsewhere, such as in an employer 401(k), this may be an option worth pursuing. 

Banks or credit unions: Some banks or credit unions allow you to open an IRA. However, investment options are usually limited to money market accounts, certificates of deposit, or similar investments. You may find you can't build a very diversified portfolio or earn a very good rate of return.

Mutual fund companies: Some mutual fund companies allow you to open an IRA directly and put your money into their funds. Your money is pooled with the cash of other investors and used to buy a mix of investments. You may have to pay fees, including management fees. 

You can also invest in mutual funds through an online brokerage account -- and are probably better off doing so because you won't be limited to one company's funds. 

How can I open an IRA? 

Once you've decided where to open your IRA, you'll need to complete some paperwork. Most IRA providers allow you to do that online in just a few minutes. Typically, the process involves the following:

  • Select your account type: Almost all brokers offer traditional and Roth IRAs. If you want to open a SIMPLE or SEP, make sure your brokerage allows it and find out if there are fees. 
  • Ask about minimum investment requirements: Some have none. Others require you to invest at least $1,000 or at least $5,000. Make sure you have enough money.
  • Select "Open Account" or "Apply for Account:" Different places use different language. 
  • Provide personal details: This includes your name, address, Social Security number, date of birth, and sometimes info about your employment or marital status. 
  • Complete additional documents: Some IRAs require you to designate a beneficiary if you pass away or submit other forms. 

How can I put money into an IRA? 

You can usually link a bank account and transfer money wirelessly once you've opened your IRA. You may also be able to send in a check or a money order. 

You could also roll over a 401(k) or an IRA from another financial institution, but only if you have one. You can learn more about rolling over a 401(k)

For many people, contributing the full amount to an IRA in one lump sum isn't possible. If you make less than your full allowable contribution when opening your account, you may want to set up an automated transfer of funds from your bank account so more money is invested periodically. Automating investments helps you build a more secure future as you can ensure you're investing enough. Consider automating a transfer of funds each month or every payday to make sure you hit the maximum IRA contribution limit for the year. 

What investments should I buy in my IRA? 

Once you have money in your IRA, you're not done with the process -- you need to invest in assets that will hopefully produce a good rate of return. 

Coming up with an investment strategy can be complicated. You want to take an appropriate level of risk, because higher-risk investments tend to produce higher returns but the chances of loss are greater. The amount of risk you should take will vary depending on your age and your risk tolerance. One good rule of thumb is to subtract your age from 110 to determine the percentage of your portfolio that should be in stocks. If you're 40 years old, you'd invest 70% of your portfolio in the market if you follow this rule. You'll also want to make sure your investments are diversified so you don't put all your eggs in one basket.

You can learn a lot about investing with our guides to investing strategies. For most people, buying ETFs or mutual funds is a simple way to get started. But picking individual stocks can give you much more control over where your money is going and sometimes allow you to earn higher rates of return. 

Whatever approach you take, do something responsible with the money -- otherwise, it will just sit in your account and do nothing. 

Now you know how to start an IRA

Now you know the key steps to starting an IRA. Decide what kind of IRA you want, determine where to open your account, fill out the paperwork, fund your account, and invest the money. Get started today, as the sooner you start saving for retirement, the sooner your money can go to work for you.