What Is the Process for Opening an IRA?

I opened an Individual Retirement Account (IRA) in my 20s. Saving for retirement as early as possible is important for financial stability.

You can open an IRA at any age as long as you or your spouse, if you jointly file your taxes, have taxable compensation, and your modified adjusted gross income is below the IRS’s annual limit. Since it’s never too late to start saving for retirement, today should be the day if you haven’t yet begun.

What Is an IRA?

An IRA enables individuals with earned income to save for retirement:

• Traditional IRA: You invest pre-tax dollars, and your money grows tax-free. You pay taxes upon withdrawal.

• Roth IRA: You invest with post-tax dollars, and your money grows tax-free. Qualified withdrawals are tax-free.

Which Factors Should You Consider Before Opening an IRA?

Consider the following when opening an IRA:

1. Your age: Contributing to your IRA at an early age requires less money invested. Compound interest over time elevates your retirement savings.

2. The amount to invest: Contributing the maximum annual limit is best. However, any amount supports your retirement goals.

3. How much your IRA can earn: Your potential earnings depend on your chosen investments. For instance, a well-diversified IRA invested in stock and bond exchange-traded funds (ETFs) can earn an annual average of 6% to 8%, depending on your asset allocation.

4. Investment options: Review the options to ensure your preferred investments are available before opening an IRA.

5. Account fees: Review the IRA management fees and expense ratios for the ETFs or mutual funds. Lower fees enable more of your money to grow.

6. Customer service: Review the Contact Us page to understand the customer service methods and hours for support to ensure you can reach the company when needed.

How Can You Determine Which IRA Fits Your Needs?

The type of IRA you open should depend on your anticipated future tax rate:

• A traditional IRA would be better if you believe your tax rate in retirement will be lower than your current tax rate. You would not pay income tax on your contributions until you start making withdrawals during retirement. You must begin making required minimum distributions (RMDs) at age 73.

• A Roth IRA might be better if you are in a relatively low tax bracket and prefer to pay taxes now. You pay income tax before making contributions, and then your money grows tax-free and can be withdrawn tax-free. You are not required to withdraw cash at any time.

What Are the Best Types of IRA Investments?

Attractive investment options for a traditional IRA include:

• Taxable bonds

• Bond ETFs

• Real estate investment trusts (REITs)

• Tax-inefficient investments with relatively high current tax obligations

Conversely, desirable investment options for a Roth IRA include fast-growing stocks and stock growth funds. You won’t have a large capital gains tax bill when you sell the stocks.

How Much Money Is Needed to Open an IRA?

The following rules apply to opening an IRA:

• The minimum amount needed to open an IRA depends on the brokerage firm or investment platform.

• The amount cannot exceed your earnings for that year.

• If you are under age 50, you cannot open an IRA with more than $7,000.

• If you are age 50 or older, you cannot open an IRA with more than $8,000.

• You might be ineligible to contribute to an IRA if your modified adjusted gross income (MAGI) exceeds specific limits.

How Much Income Should You Put into an IRA?

Investing the maximum annual amount into your IRA is ideal. However, saving any amount toward your retirement goal is important.

The following are the IRA contribution limits for 2025:

• You can contribute up to $7,000.

• If you are age 50 or above, your catch-up contribution of $1,000 increases your limit to $8,000.

You can maximize a Roth IRA if your MAGI is below the annual threshold for 2025:

• Single and head-of-household filers with a MAGI below $150,000 can contribute $7,000.

• The maximum contribution is lower for single and head-of-household filers if their MAGI is between $150,000 and $165,000.

• Taxpayers with a MAGI exceeding $165,000 cannot contribute to a Roth IRA.

• Married couples filing jointly with a MAGI below $236,000 can contribute $7,000.

• Joint filers with a MAGI greater than $246,000 cannot contribute to a Roth IRA.

How Many IRAs Can You Have?

Although there is no limit to the number of IRAs you open, the total of your contributions cannot exceed the annual contribution limit. Therefore, limiting your accounts to a traditional IRA, a Roth IRA, or one of each helps you manage your investments.

Where Can You Open an IRA?

You can open an IRA in diverse places:

• Banks and credit unions enable you to maintain your accounts in one location.

• Brokerage firms typically offer a range of investments, low or no annual management fees, and strong customer service.

• Online platforms might offer an IRA match, increasing your retirement savings.

• Robo-advisors differ in their fees, investment management, and customer service options; research them to evaluate whether they fit your needs.

What Information Is Needed to Open an IRA?

Documentation is required to verify your identity, open and fund an IRA, and list the beneficiary.

The following personal information is needed to open an IRA:

1. Full name, address, and telephone number

2. Social Security number

3. Driver’s license number

4. Date of birth

5. Beneficiary information

6. Employer information

7. Investment objectives and risk tolerance

After opening your IRA, you must provide the custodian with your banking information to facilitate cash transfers. You also must set up bank transfers to fund your IRA. Consider setting up an automatic transfer from your bank to your IRA account for monthly contributions.

The following banking information is needed to fund an IRA:

1. Bank name and address  

2. Account holder name(s)

3. Type of account (checking or savings)

4. Account number

5. Bank routing number 

What Is the Process for Opening an IRA? 

These guidelines can help you open an IRA:

1. Decide where to open your IRA. Research the IRA management fees, investment minimums, investment options, customer service options, and customer reviews to make your selection.

2. Choose a type of IRA. Decide whether a traditional or Roth IRA fits your tax and financial situation. Focus on the eligibility limits based on your income and whether you have a workplace retirement account.

3. Open an IRA. Gather the documentation required to prove your identity and open and fund your IRA. Use the information to answer questions about your demographics and financial details.

4. Fund your IRA. Link a bank account and start contributing to your IRA.

*This information is for educational purposes only.