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. Individual retirement accounts are tax-advantaged tools that can be opened by virtually anyone with earned income, unlike employer-sponsored 401(k) plans. 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.
Key Points
• Opening an IRA provides a tax-advantaged way to save for retirement, allowing individuals with earned income to benefit regardless of employer-sponsored plans.
• Selecting the right investing style, either through a robo-advisor for automation or an online broker for hands-on management, is crucial when setting up an IRA.
• Different types of IRAs, including Traditional, Roth, and SEP IRAs, offer various tax benefits and contribution limits based on income and employment status.
• The process of opening an IRA involves providing personal information, identification, and selecting beneficiaries, followed by funding the account through transfers or rollovers.
• Choosing the right investments within an IRA, such as stocks, bonds, or target date funds, should align with individual risk tolerance and retirement goals for optimal growth.
How to Open an IRA
1. Choose Your Investing Style
When setting up an IRA, you have the option to select the investing style that aligns with your preferences and goals. You can choose between two primary methods: using an online broker for self-directed investing or opting for a robo-advisor for automated investing.
• Consider a robo-advisor for a hands-off approach: If you find the array of investment choices daunting or you’re unsure where to begin, a robo-advisor might be the ideal solution. This option allows you to take a more hands-off approach and automate your investments. Simply share your retirement and investment objectives, and the robo-advisor will create and maintain a tailored portfolio specifically designed to meet your needs.
• Choose an online broker to take control of your investments: For those who prefer to be more involved and make their own investment decisions, using an online broker for self-directed investing is the way to go. This method allows you to directly manage your investments and typically comes with the benefit of commission-free trades. This is a great choice for individuals who want to actively participate in the management of their IRA investments.
2. Choose Where to Open Your IRA
You can open an IRA at a brokerage, a bank, mutual fund company, or other financial services provider. Typically, the more personal care and advice you get, the higher the account fees will be. A robo-advisor, for instance, might charge lower fees than a brokerage.
Get a 1% IRA match on rollovers and contributions.
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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
3. Choose the Type of IRA You Want to Open
Traditional IRA
If you have earned 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).
Roth IRA
Unlike traditional IRAs, there are income limits on who can open a Roth IRA. For 2024, individuals can only contribute the full amount — $7,000, with an additional $1,000 for people age 50 or over — to a Roth IRA if their income is below $146,000 for single filers. Those earning more than $146,000 but less than $161,000 can contribute a reduced amount. For married people who file taxes jointly, the limit is $230,000; those who earn up to $240,000 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).
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.
4. Open an IRA Account
Once you decide where to open an IRA, you’ll need to follow through with doing so. The process to open an IRA can vary a bit from provider to provider, but it’s generally pretty straightforward.
What You’ll Need to Open an IRA
• A copy of your government-issued ID
• Personal information, including contact information and Social Security number
• Details on intended beneficiaries
5. Fund Your Account
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.
As of 2024, you can contribute up to $7,000 a year to a traditional or Roth IRA, or up to $8,000 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. An IRA contribution calculator can help you get an idea of how much you can contribute this year.
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 growth.
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.
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. 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.
Bonus Step: Choose Your Investments
Investors can choose to invest in stocks, bonds, mutual funds, low-cost index funds, or exchange-traded funds (ETFs) — or a combination thereof – through a financial institution.
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.
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:
| Pros | Cons |
|---|---|
| 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 |
Traditional IRA
Contributions to a traditional IRA are potentially tax deductible, which can lower your taxable income for the year. However, you will pay taxes on withdrawals in retirement.
Roth IRA
With a Roth IRA, contributions are made with after-tax dollars, but the growth and withdrawals in retirement can occur tax free. This can be a significant advantage if you expect to be in a higher tax bracket in retirement.
Investing in Your Retirement
Once you’re familiar with how to open an individual retirement 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.
FAQ
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.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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