How to open an IRA: Step-by-step guide

You wouldn’t turn down an opportunity to move from coach to first class, would you? Both seats do the basic job, of course, but you’d probably choose to enjoy a little more comfort while you’re there. After all, an upgrade’s an upgrade. And an individual retirement account (IRA) just might do the same for your retirement savings. An IRA is an account that provides tax incentives for retirement savings. Depending on the IRA you open, your contributions and earnings may be tax-deferred, or your earnings may be tax-free. IRAs can offer significant tax advantages designed to motivate you to save so you can stretch those retirement dollars. If you have a fully funded retirement plan at work, like a 401(k), you’re on the right track. An IRA can help you build a little more wiggle room into your future by giving you additional tax advantages for retirement savings. You can open an IRA at a bank or a brokerage—all you need is taxable income and an idea of your retirement goals.

Related: What Is an IRA and How Does It Work?

How do you open an IRA account?

Once you’ve determined an IRA is the direction you want to take, here’s some simple steps on how to open one.

Determine your risk tolerance 

All investments involve some level of risk. You can plan your portfolio more effectively when you know your risk tolerance. Your investment plan should include a timeline, your financial goals, your portfolio size, your age and your comfort level. Are you looking for dividend paying securities for a potential boost to your golden years’ income? Or would you prefer a moderate to aggressive investment strategy that may yield higher returns? Either way, you’ll need to find a brokerage, like  Ally Invest, that offers investment services suited to your earnings goals. Just remember, investing involves risk, including loss of principal. Invest products are not FDIC-insured, not bank guaranteed, and may lose value.

What type of investor are you? Self-directed or hands off

How comfortable and willing are you when it comes to taking risks? Understanding your investor personality, savings goals, and your time horizon puts you in a position to make an informed decision about the level of risk you’re prepared to take.

• If you want to be more hands on, or you’re a risk taker and looking for more investment opportunities, a self-directed IRA may be something that you’d want to consider. A self-directed IRA is an individual account that allows you to save for retirement on a tax-advantaged basis. The difference between other IRA’s and a self-directed one is the assets that you own in the account. A self-directed IRA comes with a great deal of investing opportunities. You’re able to diversify your portfolio by investing in alternative assets such as real estate, precious metals, cryptocurrency and private equity.
• If you want to play it safe, and prefer to be more hands-off, a robo advisor may pique your interest. Entry-level investors or those who may have a lower net worth may find it useful to start their investing journey with a robo-advisor. A robo-advisor is an automated portfolio manager offered by brokerages. It uses an algorithm to make investment choices based on the information the investor provides about their financial state and themselves.

Knowing what method of investing you intend to use is only half the battle. At Ally Invest, you can open a self-directed IRA and manage your own investments, or you can sit back and let our automated smart robo-advisors handle your Ally Invest Robo Portfolio for you.

Choose where you want to open your IRA

Choosing where to open your IRA comes down to preference. Most financial institutions, banks, and credit unions will allow you to open an IRA, and some offer a wide variety of investment opportunities. However, you’ll want to do your due diligence and research because the biggest difference between most institutions will be the fee structure.

Choose the type of IRA that makes sense for you. 

All IRAs have tax advantages, but they’re not all the same. Different types of IRAs have different eligibility requirements and tax benefits. Most people end up choosing between a Roth and a traditional IRA, but there are a few other types of IRAs used for specific circumstances.

• Traditional IRAs allow you to make pre-tax contributions (subject to income levels). Your money is taxed when you take it out (take distributions) during retirement.
• Roth IRAs allow you to make after-tax contributions, so your distributions during retirement are tax-free.
• SEP (Simplified Employee Pension) IRAs are established by your employer or by you, if you’re self-employed. Contribution limits are higher than those for traditional IRAs.
• SIMPLE (Savings Incentive Match Plan for Employees) IRAs allow employers to set up IRA retirement plans for their workers and make matching contributions.

Depending on which type of IRA you choose, your contributions and earnings may be tax-deferred, or your earnings may be tax-free. It’s a good idea to work with a tax professional or financial advisor who’s familiar with your situation to help you figure out which is best for you.

Keep in mind that you can open more than one IRA in more than one place, as long as your total contributions don’t exceed the maximum annual contribution amount allowed.

Fund your IRA account.

Once you’re all set up, you’ll need choose how much and how frequently you want to contribute to your IRA.

• For 2022, you can contribute up to $6000 each year to Roth and traditional IRAs ($7000 if you’re age 50 or older).
• SEP IRA contribution limits are a little more complex, so if that’s the plan you choose, find out more about SEP IRAs here.

Learn more about the IRA Contribution Limits for 2022

Frequently asked questions about how to open an IRA 

•  How much money do you need to start an IRA? Technically, you don’t need any money to start an IRA. The IRS doesn’t set a minimum contribution limit, but it does set an annual maximum limit. However, brokerage firms and banks may have their own minimum requirement.

• Can I start an IRA on my own? You can open an IRA on your own as long as you have earned income. Choose the IRA that’s right for your financial situation and make sure you’re aware of the key differences.

• Can you open an IRA at a bank? You can open an IRA at a bank, credit union or through a broker. Again, it all comes down to preference, your investing goals and risk tolerance.

• Is a 401k better than an IRA? These two vehicles are typically the most used when it comes to saving for retirement. A 401k must be established by your employer, while the IRA is an individual account and has nothing to do with your employer. Individuals are responsible for setting up their own IRA with a bank or a brokerage firm. IRA’s and 401k both have valuable tax advantages, and you can contribute to both at the same time, but keep in mind, they both have contribution limits.

• How much does an IRA earn per year? While returns on an IRA can vary, historically IRA’s have earned between 7% to 10% in average annual returns. However, your earnings have the potential to increase when you invest your IRA contributions into opportunities such as bonds, ETFs, and mutual funds. IRA’s can also grow through compounding whether you contribute or not.

No matter which type of IRA you choose, experts agree that a consistent approach to funding that plan is key to making sure you get the maximum benefit for your retirement savings. Be sure to visit the IRS website for up-to-date information on eligibility requirements and contribution limits.

Unlike that serendipitous airline upgrade, your future comfort is squarely in your own hands. Give yourself some financial room to move in retirement and consider the advantages of saving with an IRA.

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