Individual Retirement Accounts, also known as IRAs, are crucial accounts to have for retirement planning.
You can open this account in addition to an employer-sponsored retirement account, like a 401(k).
It allows you to save additional savings for retirement and, depending on the type you open, an account that could be tax-free (Roth).
This article is your guide to all of the common questions about IRAs and how you can set one up.
With this guide, you can feel confident when signing up for IRAs!
Is it easy to open an IRA account?
Opening an IRA account is a simple process. The application is similar to opening a bank account or credit card.
The process of opening an account is choosing an investment bank with whom you want to open the account and apply. Once you apply, it’s a straightforward process to contribute and invest.
Can you open an IRA through your bank?
While traditional banks don’t offer IRA services, you may find options that are in the same ecosystem. For example, Merrill has an IRA, and since Bank of America owns them, you can bank at Bank of America and see your IRA account in one app.
Typically, you can open an IRA anywhere you can invest your money. You can open an IRA with:
- Merrill
- Fidelity
- Schwab
- Vanguard
- Robin Hood
If you currently invest with one of these institutions, it is easy to set up an IRA with your same login information. However, you should always search around to see which institution is the best for you regarding your IRA.
What are the 3 types of IRA?
There are two main types of IRAs, but a person can have a third type of IRA depending on if they have changed jobs.
The three types of IRAs are:
- Traditional
- Roth
- Rollover
Traditional IRA
A traditional IRA allows an individual to make contributions with pre-tax dollars.
You can make direct contributions in a Traditional IRA up to a certain annual limit if you are single or married. Contributions towards a Traditional IRA may be tax-deductible, depending on your income. Withdrawals are taxed as ordinary income in retirement.
There are penalties for early withdrawal. Anyone who has earned an income and is under 70 1/2 years old can open a Traditional IRA.
Roth IRA
A Roth IRA allows individuals to make contributions with after-tax dollars up to the hallowed contribution limit.
Since you are making contributions on after-tax money, you are not able to use contributions as a tax deduction.
However, earnings grow tax-free and qualified withdrawals in retirement are also tax-free. You must earn an income to contribute towards a Roth IRA, and there are income restrictions as to who can and cannot contribute to a Roth IRA.
Rollover IRA
A rollover IRA is technically a type of traditional IRA, but it is usually a separate account.
This type of IRA is specifically designed to receive funds from another retirement account, like a 401(k) or another IRA. In a rollover IRA, you do not make direct contributions. Instead, you “rollover” funds from another retirement account.
Usually, this happens if you leave an employer and want to move your 401(k) into an IRA. There are no tax penalties for rolling over contributions to a Rollover IRA, and it follows the same tax rules as a Traditional IRA.
How do I get started with an IRA?
Getting started with an IRA is a simple process if you follow these four steps.
Research: the first thing to do in signing up for an IRA is to research the type of IRA (traditional or Roth) and the institution you will open it with.
Consult a Professional: Step two is optional, but if you are able to, discussing this account with a financial advisor is a great option. They can help provide advice about how this account will help you reach your financial goals.
Apply: You will need to apply for an IRA. This can be done online or in person (depending on the institution). The application is straightforward, asking for personal information. Once you’ve applied, processing your application takes a few days.
Initial investment choices: Once you have been approved for an IRA, you can contribute right away. An IRA is a type of investment account, so you don’t want to just contribute money and let it sit there. You need to choose where you invest your contributions. This is where consulting with an advisor can be helpful.
Is it smart to open an IRA right now?
There is no perfect time to open any type of investment account, even an IRA.
It’s never too late or too early to start saving for retirement. However, with the power of compounding, signing up for IRAs as soon as possible will allow your money to grow.
Before opening an account, look at your personal financial situation.
Can you contribute (and hopefully max out your contributions) while also taking care of your other bills, debt payments, or saving for other financial goals?
An IRA should not be a burden, so it may not be the right time if you cannot pay your bills and contribute to an IRA. However, with proper budgeting, you may be able to reduce your spending while prioritizing IRA contributions.
Signing Up for IRAs
Signing up for IRAs is a simple process but can be overwhelming if you are new to investing.
An IRA is a type of retirement account to which you can contribute pre- or post-tax dollars, depending on the type you open up. The hardest part about an IRA is choosing which type is right for you, but you can have more than one.
Do your research to pick the right institution to invest with and research on what investment options you want to invest in with your contributions.
Don’t be intimidated by the process because once your account is open, contributing and investing is easy.
Editor’s note: This article was originally published Aug 14, 2023 and has been updated to improve reader experience.
Photo by Kelly Sikkema on Unsplash
