The basic process: what happens when you open an IRA

Opening an IRA means choosing a financial institution, deciding which type of IRA fits your situation, filling out an account application, and funding the account. Most of this takes place online or over the phone and can be completed in a single day. You will need a Social Security number, a valid ID, and proof of income or employment — though the institution may not ask for all three upfront.

The institution holds your money and keeps records of your contributions and withdrawals. They do not decide whether you can open an IRA; federal law sets the rules, and any bank, brokerage, or credit union can offer one. What varies is the investment options they provide, the fees they charge, and how easy they make it to move money in and out.

Key Takeaways

  • You can open an IRA at a bank, brokerage, or credit union by completing an application online, by phone, or in person.
  • You will need to choose between a Traditional IRA and a Roth IRA before you apply, because the tax treatment differs and affects your decision.
  • Most institutions let you fund your account immediately after opening it, either by transferring money from another bank account or by mailing a check.
  • You can contribute up to a set dollar limit each year (the limit changes annually), and you must have earned income in the year you contribute.
  • If you already have an IRA elsewhere, you can move that money to a new institution through a direct transfer, which avoids taxes and penalties.

Step 1: Choose the institution where you will hold your IRA

Your IRA can live at a bank, a brokerage firm, a credit union, or an online-only financial company. Banks typically offer IRAs that hold savings accounts or CDs. Brokerages offer IRAs that hold stocks, bonds, mutual funds, and exchange-traded funds. Credit unions offer both types. The choice depends on what you want to invest in and how much you want to pay in fees.

If you want simplicity and safety, a bank IRA with a CD or savings account is straightforward. If you want growth potential and are willing to accept that your balance will fluctuate, a brokerage IRA gives you more options. Many people open an IRA at the same institution where they already have a checking account, because the process is faster and the institution already has their information on file.

Step 2: Decide between a Traditional IRA and a Roth IRA

A Traditional IRA lets you deduct your contributions from your taxes in the year you make them, which lowers your taxable income. You pay taxes later, when you withdraw the money in retirement. A Roth IRA takes money after taxes, so you do not get a deduction now, but your withdrawals in retirement are tax-free.

The choice depends on your current tax bracket and what you expect your tax bracket to be in retirement. If you are in a high tax bracket now and expect to be in a lower one later, a Traditional IRA usually makes more sense. If you are in a lower bracket now and expect to be in a higher one later, a Roth IRA is often better. You can have both types of IRA at the same time, but your total contributions across all IRAs cannot exceed the annual limit.

Step 3: Complete the account application

The application asks for your name, address, Social Security number, date of birth, and employment status. Most institutions offer the application online, and you can finish it in ten to fifteen minutes. Some will ask whether you want to set up automatic monthly contributions, which you can do now or skip and set up later.

The institution may ask about your investment experience and your financial goals, but these questions do not determine whether you can open the account — they help the institution suggest investment options suited to you. After you submit the application, the institution will verify your identity and Social Security number, which usually takes a few minutes to a few hours.

Step 4: Fund your account

You can fund your IRA by transferring money from a bank account you own at another institution, by mailing a check, or by setting up automatic monthly transfers. Most institutions let you start investing immediately after you fund the account, even if the check has not yet cleared.

If you already have an IRA at another institution and want to move that money, ask the new institution about a direct transfer. In a direct transfer, the old institution sends the money directly to the new one, and you never touch it. This avoids taxes and penalties. A direct transfer usually takes five to ten business days.

Step 5: Choose how your money will be invested

At a bank, your choices are usually limited to savings accounts, money market accounts, and CDs. At a brokerage, you choose individual stocks, mutual funds, index funds, or exchange-traded funds. If you do not choose an investment, the institution may place your money in a default fund, usually a money market account that earns very little interest.

You can change your investments at any time without penalty. Many people start with a simple choice — like a target-date fund that automatically adjusts as you get closer to retirement — and adjust later as they learn more.

What you need to have ready before you start

Gather your Social Security number, a valid ID (driver's license or passport), and the name and routing number of the bank account you will use to fund the IRA. If you are transferring money from an existing IRA, have the account number and the name of the institution where it currently sits.

You will also need to know your employment status and income for the current year. You cannot contribute to an IRA unless you have earned income — money from a job or self-employment — in the year you contribute. If you are married and your spouse has earned income, your spouse can contribute to an IRA even if you do not work, but you will need to file a joint tax return.

Frequently Asked Questions

Can I open an IRA if I already have a 401(k) at work?

Yes. You can have both a 401(k) and an IRA at the same time. Your contributions to each are separate, and each has its own annual limit. However, if you have a 401(k) and earn above a certain income level, you may not be able to deduct a Traditional IRA contribution on your taxes, though you can still open and fund the account.

How much can I contribute to my IRA each year?

The annual contribution limit changes each year and depends on your age. For 2024, the limit is $7,000 if you are under 50, and $8,000 if you are 50 or older. You can only contribute money you actually earned that year, and you cannot contribute more than your total earned income for the year.

What happens if I need to withdraw money before retirement?

In a Traditional IRA, withdrawals before age 59½ are subject to income tax plus a 10 percent penalty, with some exceptions for hardship. In a Roth IRA, you can withdraw your contributions (the money you put in) anytime without penalty, but earnings are subject to the same rules as a Traditional IRA. Check with the institution about their specific policies.

Can I move my IRA to a different institution later?

Yes. You can do a direct transfer to move your entire IRA balance to another institution, which takes five to ten business days and has no tax consequences. You can also do a rollover, where you withdraw the money yourself and deposit it at the new institution within 60 days, though this carries more risk of penalties if you miss the deadline.

Do I have to invest my IRA money, or can I just keep it in a savings account?

You can keep it in a savings account or money market account if you choose. Some people do this while they are deciding how to invest, or if they want safety over growth. The downside is that savings account interest rates are usually low, so your money grows slowly compared to stocks or bonds.