How and Where to Open an IRA

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Financial experts love IRAs. They are easy to open and are an important part of your overall financial wellness. An IRA is an individual retirement account that helps supercharge your retirement savings. You can use it to build a diversified, broad portfolio that’s perfect for new investors.

IRAs also shield you from taxes when you’re saving for retirement. And the earlier you start, the better you set yourself up in your later years. 

Don’t put off opening an IRA because of fear. Use this guide to learn how to open up an IRA and get moving on your retirement fund. 

Types of IRAs

In order to understand which type of IRA you want to open, it’s important you learn which IRAs are available. IRAs come in four flavors, but two of them are the ones you’re most likely to use: Roth IRA and traditional IRA. Each has their own unique tax benefits.

Roth IRA

A Roth IRA is magical. You can use it like a savings account, meaning whatever money you put in, you can take out. Each year, you are allowed to contribute $6,000 (under age 50) and $7,000 (over 50). There are income limits ($140,000 if filing single and $208,000 if filing jointly), so if you make the big bucks, you may not be able to contribute.

The reason why Roth IRAs are magical is because whatever compound interest you make on your money is yours tax-free when you’re 59 ½. Until then, it’s not recommended you take out the profits. If you do, expect to pay a 10% penalty. 

“If I could tell my 25-year-old self one thing, it would be to maximize your Roth IRA and be aggressive. You definitely want time on your side,” Jennifer Lee, a financial advisor and the founder of Modern-Wealth told NextAdvisor. “It’s the greatest thing since sliced bread.”

Traditional IRA

A traditional IRA works opposite of a Roth IRA. The tax break comes first: you put in pre-tax dollars, meaning you get a deduction on your income taxes equal to the amount you contribute to a traditional IRA that year. When you’re 59½, you can pull the money out, and you’ll pay income tax on your withdrawals. . The contribution limits are the same as a Roth: $6,000 a year if you’re under 50, and $7,000 if you’re over 50. 

Rollover IRA

A rollover IRA does exactly what’s in the name: it lets you roll over money from one retirement account to another. The reason they exist is to help preserve your investment account if you change jobs so you don’t have to pay an early withdrawal penalty. You can choose to open up a traditional IRA or a Roth IRA when initiating a rollover IRA. There are no yearly limits when it comes to a rollover so you can move as much money as you like into the IRA of your choice. 

SEP IRA

This account is for the self-employed investors. Contributions are taxed at withdrawal but are tax-deductible now. Contribution limits to a SEP IRA are 10x that of a traditional or a Roth: you can put in $58,000 in 2021. 

Steps to Opening IRA

First off, opening up an IRA shouldn’t scare you. With just your name, address and Social Security number, you can open up an investment account in 10 minutes at a brokerage account. NextAdvisor recommends online brokerages including Fidelity, Charles Schwab, and Vanguard. These brokerages tend to offer lower fees for their investments than full-service brokers, and are beginner-friendly. 

Pro Tip

Avoid IRA products offered by banks, since they tend to offer more conservative investments. Instead, open an IRA with an online brokerage.

Before you open an account, figure out which type of investment account you’d like. A Roth IRA is a good option for beginner investors, since your account grows tax-free. 

Once your account is open, you need to fund it. Most brokerage accounts let you link your debit card to your account for easy transferring. Once there is money in your account, you need to invest it. Don’t make the mistake of missing this step — you need to invest your money once it’s deposited. 

How to Choose Your Investments

With a 401(k), there is typically a list of investments to choose from. You select the fund that best meets your needs and it’s settled. With an IRA, the sky’s the limit. This can be overwhelming for new investors; but you don’t have to go it alone when choosing investments.

“Folks feel like they have to do it themselves or are intimidated by the thought of making a mistake, but there’s no shortage of knowledge out there if you just ask,” says Alex Klingelhoeffer, a fiduciary financial adviser with Exencial Wealth Advisors. 

In other words? Pick up the phone and call the brokerage. 

Index fund investing is a commonly recommended strategy for new investors. It offers diversified exposure to the market by tracking an index (like the S&P 500). In this example, if you purchase a mutual fund or exchange-traded fund that tracks the S&P 500, the fund will hold stock of the 500 companies in that index. This makes sure your account is diversified, meaning your investments are spread out within a bunch of different stocks, not just one. If you go all-in on one single stock, you could lose a lot of money if that stock tanks. 

Klingelhoeffer says that investors often pick stocks for companies they use since they know and like the business. Rather than buying stock because you like the company, he suggests that you think about diversification. Assuming you need the money in retirement, how can you make sure you will have enough saved by your ideal retirement age? How much should you contribute per year to catch up, and what level of risk will help you accomplish your goal without losing sleep? Using a savings calculator can help you figure out what your portfolio will look like in retirement. 

What if You’re Rolling Over a 401k?

If you’re rolling over a 401(k), the first step is to open that IRA account. You have the option to open up a Roth IRA or a traditional IRA. Once that account is open, contact the brokerage that holds the 401(k). Tell them you need to roll over the account to an IRA. There may be paperwork required on their end to complete this process. 

Most of the time, the brokerage that holds the 401(k) will close the account and send a check. The check should be made out to the new brokerage for the benefit of you, the investor. Your IRA account number should be listed in the check memo line. This ensures the money will go to the right account. Since the check is made out to the brokerage for your benefit, you won’t need to endorse it. Instead, you’ll mail it to the new brokerage and they’ll use it to fund your IRA account. Some accounts also let you do mobile deposits.

Funding an IRA

You need to put cash into your IRA account before you can invest it. Many investors choose to link their bank account, so they can transfer funds electronically. If you’re a set-it-and-forget-it kind of investor, you can even set up recurring transfers to fund your IRA. 

If you’re rolling over another retirement account into the IRA, that money can fund the account. 

FAQs

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.