Content of the material
- Step 1: Choose where to open your IRA
- Different Rules for Roth IRAs
- Choosing your investments
- Think of your IRA like a bucket
- How To Save Up for Roth IRA Contributions
- How Much Money Does it Take to Start an IRA?
- Step 3: Open your IRA account
- Step 2:
- Fund your account
- Can You Contribute the Same Amount to a Roth IRA as You Can to a Traditional IRA?
- How much does it cost to open an IRA?
- Should you open an IRA with your bank?
- How to open an IRA?
- Best for experienced investors
- Minimum deposit and balance
- Investment vehicles
- Traditional vs Roth IRA?
- What is the deadline to contribute?
- Account Opening and Funding Questions
- Account Opening and Funding Questions
- How often should I contribute to an IRA?
- How to Open an IRA Account
- View important information about our online equity trades and Satisfaction Guarantee
Step 1: Choose where to open your IRA
The first step is to choose what type of institution you’ll open your IRA through. There are many options to choose from, including banks, brokerage firms and robo-advisors.
If you want a hands-off role in your IRA, then a robo-advisor may be a better choice. These typically come with low management fees, risk-based investment options, automatic portfolio balancing, and other perks. They can often be managed easily using an online dashboard.
For more hands-on investors, a brokerage may be a better option. Brokerages offer full-service management and may have a wider selection of investments. If you want the most economical option, consider looking for brokers with low or no account fees and a variety of commission- and fee-free investment options. These are often called discount brokers.
Avoid basing your decision off fees or commissions entirely. While choosing an affordable solution is important, other factors should play a role, too, including your level of tech-savvy, your investment know-how, the institution’s investing minimums, and the service they’re known for.
“Consider the overall service you’ll be receiving,” says Heather Welsh, vice president of wealth planning at Sequoia Financial Group. “While robo-advisors are generally inexpensive, your level of comfort with technology might suggest taking a different direction and talking with your bank or financial advisor.”
Different Rules for Roth IRAs
Up until now, we’ve discussed traditional or standard IRAs. When setting up an IRA, most investors have two choices: the original version of these savings accounts, which dates back to the 1970s, and the Roth variety, introduced in the 1990s. In some respects, the tax treatment of the Roth IRA is just the opposite of its older cousin. Instead of getting a tax deduction on contributions upfront, account holders kick in post-tax money that they can withdraw tax-free in retirement.
The Roth version of the IRA has the same contribution limits as a standard IRA. But unlike traditional accounts, the government places restrictions on who can contribute. To determine your eligibility, the IRS also uses MAGI as a metric. Basically, it’s your total income minus certain expenses.
Most taxpayers qualify for the full contribution allowance, although certain higher-earning individuals are only permitted a reduced amount. In 2021, single filers with a MAGI of more than $140,000 ($144,000 for 2022) per year and joint filers who brought in more than $208,000 ($214,000 for 2022) were disqualified from Roth IRA contributions altogether.
There’s another area in which Roth IRAs differ from traditional IRAs. With traditional IRAs, you have to start taking required minimum distributions (RMDs) from your account at age 72. The RMD age used to be 70½ but was raised to 72 following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Choosing your investments
If you open an IRA with Betterment, one advantage is that you don’t need to choose individual investments – you simply select how aggressive or conservative you want to be on a scale of 1-100.
When you open an IRA at a broker or mutual fund company, however, you then need to choose how you’ll invest your money. If you open the account but do not select investments, your money will simply sit idle earning no interest (or a very small, less than 1%, annual interest rate).
Think of your IRA like a bucket
An IRA is like a bucket. The financial institution gives you the bucket when you open the account and tells you “this is a special bucket and any money you put into it will be protected from certain taxes”. It’s up to you, however, to decide what to put into the bucket.
You can simply deposit cash in a savings account, but it will only earn a very small interest rate, and that’s not very good for long-term appreciation.
Alternatively, you could put sketchy penny stocks or volatile IPO stocks into your bucket. That’s also not so good because those investments are so risky you stand to lose most of your deposit.
Instead, you want to put a diversified mix of stocks, bonds (and maybe some cash) into your bucket to create a so-called “balanced portfolio”. This means that you have a mix of investments that should appreciate over time but are diversified enough that you are as protected as possible from potential losses.
This is where most new investors get hung up — choosing from the tens of thousands of available investments is overwhelming to say the least!
Diving into choosing investments is the topic of posts like these on how mutual funds can help you start investing and getting started with exchange-traded funds. You can also read our list of the best mutual funds and ETFs for new investors.
If you decide you want to learn about funds before you invest, you can research funds a free Morningstar account — Morningstar is my go-to source for investment data and research.
How To Save Up for Roth IRA Contributions
Determining how much you’ll contribute to an IRA will depend on a number of aspects about your personal financial situation and goals. For example, you may want to consider first contributing to a 401(k) before an IRA if your employer provides matching contributions. Or you may first want to pay off high-interest debt.
Once you’ve opened an IRA you can begin making deposits and investing money. The earlier you can start saving for retirement, the better.
You can work to increase your contributions by creating a budget that allots a specific amount of your monthly income toward your retirement goals. Over time, even small deposits add up.
How Much Money Does it Take to Start an IRA?
Now you know what type of account to open, so how much do you invest? Technically, you don’t need anything to open an IRA since the Internal Revenue Service (IRS) doesn’t set minimum contribution limits — only annual maximums. However, individual brokerage firms have minimum requirements and you want to employ a healthy contribution strategy to maximize rewards.
When it comes to your contributions, remember that the important thing is to just get started. Small amounts of money can add up over time, and from there, compound interest can do its magic and help your account balance balloon. Here’s one way to think about it:
|Monthly Contribution||Annual Contribution|
Let’s say you’re 30 years old, and you contribute $100/month for a total of $1,200 a year to your Roth IRA. By the time you’re 67 and ready to retire, you’ll have saved $204,000 that won’t be subject to income taxes. That can go a long way to support a happy retirement.
Now that you understand the process a bit more, figure out which brokerage firm to use for your IRA, and how much you need to actually open an account and get the ball rolling. Once your account is up and running, you can figure out how much to contribute regularly, whether that’s $100 per month or $100 per week.
Step 3: Open your IRA account
Opening your account is usually pretty simple, and often, can be done online or easily through your brokerage. However, the exact process will vary.
“How you open an account will depend on your selected IRA provider or advisor,” Welsh says. “If you take the do-it-yourself approach, you can likely do it online. If you work with a bank or advisor, you will be provided with forms to open the account, either electronically or in hard copy depending on their processes and your preferences.”
Typically, you’ll be asked for the following documentation and information:
- A copy of your government-issued ID, such as a driver’s license or passport
- Your personal information, including your name, phone number, address, date of birth, and Social Security number
- Details on your beneficiaries, or who you’d like to inherit the account when you die
- Your preferred contribution method
- Banking information (if you want to fund the account with an electronic transfer) or information on your other 401(k) or IRAs (if you’re doing a rollover)
If you opt to roll funds over from a 401(k) or another retirement, you’ll also have some forms to fill out there. Some will send the money directly to your new IRA account. Others may send you a check, which you’ll then need to deposit into the new IRA yourself. Typically, the whole process takes anywhere from two to four weeks.
If you rollover funds to a traditional IRA, you won’t need to pay taxes on the funds (until you start making withdrawals). If you roll over funds to a Roth IRA, though, you’ll owe taxes on the rolled-over amount when you file your annual returns.
Fund your account
Once you’ve opened your account, there are several ways to fund it.
- Consider maximizing your contributions each year, up to $6,000 for 2022. And if you’re age 50 or older you can save up to $7,000. As long as you are still working, there is no age limit to be able to contribute to a Traditional IRA. The Secure Act, signed into law on December 20, 2019, removed the age limit in which an individual can contribute to an IRA.
- Transfer other IRA assets We’ll guide you through the process of moving your outside IRA assets to a Fidelity IRA.
- Roll over old 401(k)s We have an easy to follow rollover process, with access to a rollover specialist along the way.
Be sure to consider all your available options and the applicable fees and features of each before moving your retirement assets.
Can You Contribute the Same Amount to a Roth IRA as You Can to a Traditional IRA?
Yes. The contribution limit for both types of IRAs is the same: In 2021 and 2022, you can contribute up to $6,000, and if you are age 50 or older you can put in an extra $1,000 "catch-up" contribution. However, if you are contributing to more than one IRA, the totalamount of your combined contributions cannot exceed $6,000 ($7,000 if you are 50 or older).
How much does it cost to open an IRA?
Brokerages generally don’t charge a fee to open an IRA, but you will need to fund the account. Some brokerages have minimums required to fund a new account. If one brokerage is too expensive, find another that’s cheaper. There are many options out there to choose from.
Should you open an IRA with your bank?
No, a better option is to choose an online brokerage to set up an IRA. Banks do not offer the variety of investment options that brokerages do.
How to open an IRA? Select an online brokerage, open an account (you’ll need some documentation for this), and fund the account.
Best for experienced investors
Minimum deposit and balance Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguard account, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enrollFees Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you opt into paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% in advisory fees (after 90 days)Investment vehicles Robo-advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading Other: Vanguard 529 Plan See our methodology, terms apply.
ProsNo commission fees for stock and ETF tradesNo transaction fees for over 3,000 mutual fundsOne of the largest ETF and mutual fund offerings aroundRobo-advisor Vanguard Digital Advisor® available for 90-day free trial with no advisory feesVanguard 529 Plan helps you save for college early onExcellent customer serviceOffers retirement planning toolsCustomers get access to GetHuman, a website dedicated to human-to-human customer service, with features that include talking to a Vanguard rep, notice of the current hold time, reminders to call when call center opens, as well as pro tips and talking points for customersVanguard Personal Advisor Services® available for personalized supportConsMany retirement funds require $1,000 to invest$20 annual service fee for IRAs and brokerage accounts (investors can waive this fee by opting into paperless statements)Robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enroll and charges up to 0.20% in advisory fees (after 90 days)Basic trading platform onlyNo robust research and data toolsLearn MoreView More
Traditional vs Roth IRA?
The big difference between traditional and Roth IRAs is when you pay taxes.
With a traditional IRA, you contribute pre-tax dollars. While this is better for your immediate cash flow as you're taking out less from your disposable income now, your money grows tax-deferred and later in retirement you will have to pay income tax on any funds you choose to withdraw. This is a good option if you think you will be in the same or a lower tax bracket (have the same or less income) when you retire. If you withdraw either your pre-tax contributions or earnings from your traditional IRA before age 59 and a half, you'll be taxed in addition to incurring a 10% early withdrawal penalty fee.
With a Roth IRA, you pay taxes upfront by contributing after-tax dollars. While this is a bigger hit to your immediate cash flow since you are taking out more from your disposable income now, your money grows tax-free and so in retirement, withdrawals are generally not taxed as long as your account has been open for at least five years. This is a good option if you think you will be in a higher tax bracket (have more income) when you retire.
You can withdraw your after-tax contributions from your Roth IRA at any age tax- and penalty-free. If you withdraw any earnings you've made on your investments before age 59 and a half, you will incur a 10% early withdrawal penalty (though it won't be taxed like a traditional IRA). Some exceptions to this early withdrawal penalty on Roth IRAs include first-time home purchases, college expenses and birth or adoption expenses.
You can use calculators like this one from Charles Schwab to help you decide between choosing a traditional or Roth IRA.
What is the deadline to contribute?
You can contribute to an IRA at any time during the calendar year and up to tax day of the following calendar year. For example, taxpayers can contribute at any time during 2021 and have until the tax deadline (April 18, 2022) to contribute to an IRA for the 2021 tax year. This means that not only do you have to open the account by this date, you must have funded it, too.
But this long contribution window means that as soon as you have your 2021 contributions settled, you can start contributing for 2022, rather than scrambling at the end of tax season in 2023.
And if you file your taxes before you make your contribution? No big deal. As long as you make your IRA contribution before the tax deadline, you can refile your tax return and still get the tax benefit. It’s a little extra work, but definitely worth the hassle for the savings.
Account Opening and Funding Questions
Account Opening and Funding Questions
- What if I have accounts elsewhere?
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- What do I need to open a Traditional IRA account?
- Social security number(s)
- Driver’s license
- Employer’s name and address (if applicable)
- Statement information for any assets or cash you’d like to transfer
- Beneficiary information
- How do I open an IRA account?
The online account application process only takes about 10 minutes. Key steps include:
- Choosing the type of IRA account
- Providing your personal, employment, and financial information
- Selecting specific account features
- Creating login credentials and providing contact information for your account
- Verifying your identity
- Indicating how you’ll fund the account
- How do I fund my account?
There are multiple ways to fund your new Schwab account:
- Electronic funds transfer (EFT) with Schwab MoneyLink® to transfer funds or assets from an external account. You may also continually fund your account by setting up auto deposit to transfer funds from your checking account.
- Wire transfer request from another financial institution.
- Check deposit by mail or in person at your local Schwab branch.
Full funding instructions and access to online fund transfer tools will be provided after your account is opened.
How often should I contribute to an IRA?
Make it consistent. The other key is to make consistent contributions — even better to automate the process altogether (contact your HR department to set up automatic paycheck contributions or set up an automatic transfer from your bank). For one, this ensures you’re making saving a habit. But there’s an additional benefit, known as dollar-cost-averaging.
It works like this: If you want to max out your IRA, you could invest $6,000 all at once, or you could invest $500 each month. Investing in increments is one way to dull the psychological impact of market volatility because you aren’t watching a large sum of money potentially decline in value out of the gate. Dollar-cost averaging may also help you arrive at a better average price for your portfolio investments.
If you have the funds and can stomach a little volatility, a Northwestern Mutual analysis shows investing a lump sum all at once tends to outperform dollar-cost averaging over the long run. Regardless, it’s beneficial to develop a consistent investment strategy that works for you and makes it easier to participate in markets for the long term.
How to Open an IRA Account
Before you open a traditional IRA, decide whether you’re an investor who would prefer to manage an IRA account by yourself or if you’d rather have a more hands-off approach in which someone else manages your account for you.
If you like following markets, trading stocks and planning your investment strategy, a hands-on approach to your IRA would probably be best. Check out the brokerage platforms that we suggest above for self-directed investors.
Hands-off investors still need to pay a certain level of attention to their IRA investments, but they’re perfectly happy letting a robo-advisor create an investment portfolio and manage it for them. (You could also get the best of both worlds, so to speak, by investing in a target-date fund in a self-directed IRA account.)
There are other ways to open an IRA and save for retirement. You can opt to hire a financial advisor to plan out your retirement strategy, and they can open an IRA and manage the account for you, though this will be costly. Banks also offer IRAs, although they tend to be limited to holding certificates of deposit (CDs).
View important information about our online equity trades and Satisfaction Guarantee
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Opening an IRA is a great way to save more money for retirement and the future, and that’s true whether you opt for a traditional IRA or a Roth IRA. Just remember that each type of IRA has pros and cons, and you’ll need to consider your tax situation now and what it might look like later.
Still, you shouldn’t get so caught up in the rules and minutiae of these accounts that you fail to open one altogether. Do some basic research then decide which brokerage firm will meet your needs the best. From there, open an account and start contributing as much as you can. The rest of the details will work themselves out, but only if you get started.