The basic steps to start an IRA

Opening an IRA involves three separate actions: choosing which type of IRA fits your situation, picking a financial institution to hold it, and moving money into it. You do not need to do all three on the same day, and the order matters because your choice of institution often determines what investments you can hold inside it.

Start by deciding between a Traditional IRA and a Roth IRA. The difference is when you pay taxes: Traditional IRAs let you deduct contributions now and pay taxes when you withdraw in retirement; Roth IRAs take after-tax money now but let withdrawals come out tax-free later. Your income, current tax bracket, and whether you have access to a workplace retirement plan all affect which one makes sense. Once you know which type, you choose a provider — a bank, brokerage, or credit union — and complete their account opening process, which is usually online and takes 10 to 15 minutes.

Key Takeaways

  • You must choose between a Traditional IRA and a Roth IRA before opening an account, because the tax treatment is permanent and affects your long-term strategy.
  • Financial institutions that hold IRAs include banks, brokerages, and credit unions, and each offers different investment options inside the account.
  • Funding an IRA means transferring money from your bank account to the IRA, and you can do this once a year or in smaller amounts throughout the year.
  • For 2024, the annual contribution limit is $7,000 for people under 50 and $8,000 for people 50 and older, and exceeding this limit triggers a tax penalty.

Choosing between Traditional and Roth

A Traditional IRA reduces your taxable income in the year you contribute. If you earn $60,000 and contribute $7,000 to a Traditional IRA, your taxable income becomes $53,000. This is useful if you are in a high tax bracket now and expect to be in a lower one in retirement. You pay taxes on the money when you withdraw it after age 59½.

A Roth IRA takes money you have already paid taxes on. You do not get a tax deduction now, but all growth and withdrawals after age 59½ are tax-free. Roth IRAs are often better if you are young, in a lower tax bracket now, or expect your income to rise significantly. Roth IRAs also have no required withdrawals at any age, which gives you more control over when to take money out.

Income limits apply to Roth IRAs — if you earn above a certain threshold, you cannot contribute directly. For 2024, the phase-out range for single filers starts at $146,000 and ends at $161,000; for married filing jointly, it starts at $230,000 and ends at $240,000. These numbers change each year. Traditional IRAs have no income limit, but if you or your spouse have a workplace retirement plan, the tax deduction phases out at higher incomes.

Where to open an IRA account

You can open an IRA at a bank, a brokerage firm, a credit union, or a robo-advisor platform. Banks typically offer IRAs that hold savings accounts, CDs, or money market accounts — safe, low-growth options. Brokerages like Fidelity, Charles Schwab, and Vanguard let you invest in stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Credit unions often offer both savings-based and investment-based IRAs. Robo-advisors like Betterment or Wealthfront automate investment choices based on your age and risk tolerance.

The choice depends on what you want to invest in. If you want to keep your IRA in a savings account or CD, a bank works fine. If you want to buy individual stocks or a diversified portfolio of funds, you need a brokerage. Most brokerages charge no fee to open an IRA and no annual maintenance fee, though some charge per transaction or per fund. Compare fee structures before you decide.

Once you have chosen a provider, go to their website or visit in person and select "Open an IRA." You will need your Social Security number, date of birth, address, and employment information. The process is usually complete within minutes, and you receive an account number immediately.

How to fund your IRA

Funding means moving money from your bank account into the IRA. Most institutions offer three methods: electronic transfer from your bank account, a check mailed to the institution, or a rollover from another retirement account.

An electronic transfer is fastest. You log into your IRA account, select "Fund Account" or "Add Money," and enter your bank account details. The institution pulls the money directly, usually within one to three business days. A check takes longer — you write a check to the financial institution, mail it, and wait for it to clear, which can take one to two weeks. A rollover happens when you move money from a 401(k), 403(b), or another IRA into your new IRA. The old institution sends the money directly to the new one, and you have 60 days to complete the transfer or face taxes and penalties.

You can fund your IRA in one lump sum or in smaller amounts throughout the year. Many people set up automatic monthly transfers of $500 or $600 to spread contributions evenly. The total you contribute across all your IRAs — Traditional and Roth combined — cannot exceed the annual limit.

Annual contribution limits and deadlines

For 2024, you can contribute up to $7,000 to an IRA if you are under 50, or $8,000 if you are 50 or older. These limits apply to the total of all IRAs you own, not per account. If you have both a Traditional IRA and a Roth IRA, your combined contributions cannot exceed the limit.

The deadline to contribute for a given tax year is typically April 15 of the following year. For example, you can contribute to your 2024 IRA until April 15, 2025. If you miss the deadline, you cannot go back and contribute for that year, though you can still contribute for the current year.

If you contribute more than the limit, the excess is subject to a 6% excise tax each year it remains in the account. You can withdraw the excess and any earnings on it before your tax return deadline to avoid the penalty, but it is better to track your contributions carefully and stay within the limit from the start.

What happens after you fund the account

Once money is in your IRA, you choose what to invest it in. At a bank, your options are limited to savings accounts, CDs, or money market accounts. At a brokerage, you can buy individual stocks, mutual funds, ETFs, bonds, or keep cash. At a robo-advisor, the platform automatically invests your money based on a questionnaire about your age and risk tolerance.

You do not have to invest the money immediately. Many people fund an IRA and then take time to decide where to put it. The money sits in a cash holding area until you direct it elsewhere. However, cash does not grow, so leaving it there long-term means you miss out on potential returns.

Your IRA grows tax-free (in a Traditional IRA) or tax-free on withdrawals (in a Roth IRA). You cannot withdraw the money before age 59½ without a 10% penalty, with a few exceptions like first-time home purchases or medical hardship. Once you turn 73, Traditional IRAs require you to take minimum withdrawals each year; Roth IRAs have no such requirement.

Common mistakes when opening an IRA

One frequent error is opening multiple IRAs at different institutions and losing track of total contributions. If you have a Traditional IRA at one bank and a Roth IRA at a brokerage, your combined contributions still cannot exceed the annual limit. Keep a simple spreadsheet or note of all your IRAs and how much you have contributed each year.

Another mistake is funding an IRA but leaving the money in cash. Cash earns little to no interest, so your account grows slowly. If you are unsure what to invest in, a target-date fund — a single fund that automatically adjusts its mix of stocks and bonds as you approach retirement — is a simple starting point.

A third error is missing the April 15 deadline. Mark it on your calendar or set a phone reminder in early April so you do not accidentally skip a year. Skipping even one year means you lose that year's contribution room forever.

Frequently Asked Questions

Can I open an IRA if I do not have earned income?

No. To contribute to an IRA, you must have earned income — wages, salary, self-employment income, or taxable alimony. Passive income like dividends or rental income does not count. If you are married and your spouse has earned income, you may be able to open a spousal IRA, which lets you contribute based on your spouse's earnings.

What is the difference between a rollover and a transfer?

A rollover is when you withdraw money from one retirement account and deposit it into another within 60 days. A transfer is when one institution sends money directly to another on your behalf. Transfers are safer because the money never touches your hands, and there is no 60-day deadline. If you are moving money from an old 401(k) to an IRA, ask the old employer to do a direct transfer.

Can I open an IRA and a 401(k) in the same year?

Yes. An IRA and a 401(k) are separate accounts with separate contribution limits. You can contribute up to $7,000 to an IRA and up to $23,500 to a 401(k) in 2024 (if your employer offers one). However, if you have both, the tax deduction for a Traditional IRA may be reduced depending on your income and whether your 401(k) is through your employer.

What happens if I contribute to an IRA but then lose my job?

Your IRA is yours alone and is not tied to your job. The money stays in the account and continues to grow. You can keep contributing to it as long as you have earned income from any source, including self-employment or a new job. If you have a 401(k) from your old job, you can roll it into your IRA.

Do I need to report my IRA to the government?

You report IRA contributions and withdrawals on your tax return. For Traditional IRAs, you deduct contributions on Form 1040. For Roth IRAs, you do not deduct contributions, but you must report them if you are over the income limit and using the backdoor Roth method. Your IRA provider sends you a Form 5498 each year showing your contributions, which you keep for your records.