Opening your first IRA can be intimidating. To help, we’ve written a step-by-step guide on where and how to open an IRA. It’s easier than you think.
So you’re thinking it’s time to open an IRA? That’s great news! An individual retirement account (IRA) is an excellent option. It will give you tax benefits as you save for retirement.
Opening an IRA can seem like an intimidating process. But it’s really pretty simple. Here, we’ll detail the six steps you need to follow to get it done.
How to Open Your First IRA
1. Make the Roth vs. Traditional Decision
Before you can open an IRA, you need to make one major decision: Roth or traditional.
A traditional IRA is one that lets you put in pre-tax dollars. You take a tax write-off in the year of contribution (assuming you’re eligible). You don’t pay taxes on the returns that accrue in your account. But you’ll pay income taxes on withdrawals during retirement.
With a Roth IRA, you contribute after-tax dollars to the account. But when you withdraw the money, you don’t pay any taxes.
Not everyone is eligible for a Roth IRA. So check out the eligibility requirements here before you put a lot of time into this choice.
Deciding between these two options can take some time. You’ll need to do some math based on your current marginal tax bracket, state and local income taxes, and projected taxes during retirement. We won’t go into all the calculations here. If you’re not yet sure whether to go Roth or traditional, read this article for a primer on how to do the math.
2. Decide What You Want to Invest In
You can narrow down the list of potential IRAs by deciding ahead of time what you want to invest in. For instance, you could invest in a combination of individual stocks and bonds. Or you could invest in mutual funds or ETFs. Another option is to invest in certificates of deposit.
Here a Dough Roller, we often suggest investing in mutual funds or ETFs. These can give you access to a wide, balanced range of investment options. They may be less volatile than individual stocks. And they are often less expensive.
Need more information before you can decide? Check out these articles on different types of investments:
How to Invest in a Mutual Fund
What are ETFs (and Are They a Strong Investment Option)?
Mutual Funds vs. ETFs–Does it Really Matter?
How (and Why) to Create a CD Ladder
3. Decide How You Want to Manage Investments
The next decision you need to make is how you’ll manage your investments. Do you want to manage them all yourself as a hands-on investor? Do you want someone else to manage them for you? Perhaps you want something in between these extremes?
This decision is somewhat less crucial than your first choice. You can change your mind later if you decide differently.
Here are some of the main options to consider:
- Self-Driven Investing: So you want to take charge of your investments on your own? In this case, you may need to open your account with a brokerage like TD Ameritrade or Ally Invest. These brokerages will give you access to a variety of investments, including stocks. You could also open an IRA with a mutual fund company like Vanguard or Fidelity. This option lets you drive your own investments through mutual funds, rather than individual stocks.
- Target-Date Investing: Want to take a more hands-off approach to investing? Consider opening an IRA at a brokerage that offers target-date investing. Basically, this automatically balances your portfolio based on your estimated retirement date. As you get closer to retirement, your investments will become more conservative and, likely, stable. Mutual fund companies often offer target-date funds.
- Robo-Advisors: Robo advisors like Betterment and Wealthfront help you manage your investments in ETFs. These options start you out with a questionnaire to determine your risk tolerance. They set up your portfolio based on your answers. Then you can track and manage your investments from their online interfaces.
4. Research Your Options
Once you’ve narrowed down your choices by answering questions two and three, you’re ready to choose where you’ll open your IRA. There are some great options available these days. Some of our favorites are TD Ameritrade, E*Trade, and Betterment. Click the links to check out our reviews on each of those options.
What, exactly, should you look for when reviewing your investing options? Here are some questions to answer before you decide where to open your IRA:
- How much will they charge? It is absolutely essential that you pay attention to fees when it comes to investing. Even a single percentage point can make a huge difference over the course of your investing life. Know that you’ll likely get hit with fees for maintaining an account and trading. You may face additional fees for managed accounts and for the particular investments you choose. Some fees are inevitable. The goal is to earn good returns while paying as little as possible in fees.
- What’s the minimum to open an account? This will matter less if you have a few thousand dollars available when you open your IRA. But if you’re strapped for cash, check the minimum contribution to open an account.
- What investments do they offer? Obviously since you spend time in the last two questions deciding how you wanted to invest, you need to answer this question. Different IRAs will let you access different investment types, from ETFs and real estate funds to individual stocks and bonds. Be sure your choice aligns with your investing goals.
- How easy is the account to manage online? If you’re like most modern investors, you’ll want to manage your account online, and maybe even through an app. Most of our favorite companies have good-to-great online interfaces. Just be sure you understand how the interface works so you can manage your investments easily.
- What do reviews have to say? Finally, check out solid reviews of the companies you’re considering. Some will have better customer service than others. Some will have an easier-to-use online interface. Checking out reviews will help you find the answers to questions like these.
5. Open and Fund an Account
Actually opening an account is pretty simple once you’ve worked through the decisions. With most IRA offerings, you can apply online. You’ll need to provide some personal information, such as your name, address, and Social Security number. If you’re choosing a robo advisor, you’ll also walk through a questionnaire to help the advisor set up your portfolio.
Then, you’ll most likely be able to link your funding account to your IRA. Often times, you’ll need to wait for one or two micro-deposits to hit your funding account. Once you confirm these micro deposits, the accounts will be linked. You can then fund your IRA and get started investing.
6. Keep Going and Growing
Now that you’ve opened your first IRA, you just need to keep funding it and keep tabs on it. You can contribute just a few bucks a month. Or you can contribute all the way up to the federal maximum limit for that year. (Check here for the latest federal limits.)
If you decided to start out in a managed account—whether a target-date fund or a robo advisor account–do some more research. Learn more about investing. This way, you can at least be sure you’re happy with the choices the system is making for your investments. And if you aren’t happy, you’ll be empowered to make different choices for yourself.
A Note for the Self-Employed
This article has mainly focused on the simpler topic of traditional and Roth IRAs for those in traditional employment. If you’re self-employed, though, you have a wider variety of options available to you. Your steps will be similar to those above. But you’ll first need to decide what type of IRA to open.
You can get more information on self-employment retirement options in this article. Start there. Then come back here to complete the standard five steps for opening an IRA.
How to Manage Your IRA
Track and Analyze your Investments for Free: Managing investments can be a hassle. You may multiple IRAs, multiple 401ks, as well as taxable accounts. And then there are bank accounts. The easiest way to track and analyze all your investments, regardless of where they are located, is with Personal Capital’s free financial dashboard.
Personal Capital enables you to connect all of your 401(k), 403(b), IRAs, and other investment accounts in one place. Once connected, you can see the performance of all of your investments and evaluate your asset allocation.
With Personal Capital’s Retirement Fee Analyzer you can see just how much your 401k and other investments are costing you. I was shocked to learn that the fees in my 401(k) could cost me over $200,000!
Personal Capital also offers a free Retirement Planner. This tool will show you if you are on track to retire on your terms.
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