Here's how to open an IRA in five easy steps.
Step 1: Decide how you want to be guided
Some investors are content to use an online robo-advisor that can walk them through the process, while others prefer a human to answer very specific questions.
Step 2: Figure out where you want to open your IRA
A brokerage is the most common place to set up an account, although most banks, credit unions, mutual fund providers, and other investment companies can help you. Most institutions offering IRAs allow you to set one up online. You'll want to ask about fees. Some providers charge setup, transaction, or monthly maintenance fees.
Step 3: Choose the type of IRA you want
Your choice will be based on your personal investing preferences and unique financial situation, current and future. There are currently four types of IRAs:
- Traditional IRA: Deposits may be tax-free, depending on your income and whether you're covered by a workplace plan, but withdrawals are taxed.
- Roth IRA: Deposits are taxed, but withdrawals of contributions and earnings are tax-free once you're 59 1/2 and you've had the account for at least five years.
- SIMPLE IRA: These are designed for small businesses without an existing retirement plan.
- Simplified employee pension plan (SEP-IRA): This IRA allows employers to make contributions to an IRA for themselves and their employees.
Although most IRAs give you almost unlimited freedom of investment choices, the IRS sets annual IRA contribution limits that vary depending on the type of retirement account and your age.
Step 4: Decide how much you want to invest
The ideal amount is the maximum allowed with your specific type of IRA, deposited early in the year to allow compounding more time to work its magic. Unfortunately, we can't all do that. Try to set up an automatic weekly, biweekly, or monthly contribution that doesn't prevent you from paying off high-interest credit cards and loans or from maintaining an emergency fund.
Step 5: Open your IRA
Again, most financial institutions can walk you through the process from their website. It's also possible to walk into a bank, credit union, or brokerage and ask for help setting up a retirement account. As a general rule, financial institutions are only too happy to help you with your deposit.
You shouldn't need much in the way of identification; a Social Security number and government-issued identification are usually enough. If you're transferring money from an account to a bank or brokerage offering the IRA, you'll also need your relevant banking information, including bank routing and account numbers.
