What an IRA is and why you might want one
An IRA (Individual Retirement Account) is a savings account the federal government created to let you set money aside for retirement with tax advantages. The money you put in may reduce your taxes now, the money grows without being taxed each year, or you withdraw it tax-free in retirement — depending on which type of IRA you choose. You open an IRA through a bank, brokerage firm, or credit union, not through the government.
The main reason to open one is that the tax break makes your money grow faster than it would in a regular savings account. If you have earned income from a job or self-employment, you can open an IRA. There is no income requirement to start one, though there are income limits on whether you can deduct contributions on your taxes (those limits change each year and depend on whether you have access to a workplace retirement plan).
The two most common types are a Traditional IRA, where contributions may be tax-deductible now and you pay taxes when you withdraw in retirement, and a Roth IRA, where you contribute after-tax dollars now but withdrawals in retirement are tax-free. Which one makes sense depends on whether you expect to be in a higher or lower tax bracket in retirement — a question worth discussing with a tax professional if you are unsure.
Key Takeaways
- You open an IRA at a bank, brokerage, or credit union by providing your name, Social Security number, and employment information, then choosing how much to contribute.
- For 2024, you can contribute up to $7,000 per year to an IRA if you are under 50, or $8,000 if you are 50 or older (these limits change annually).
- A Traditional IRA may let you deduct contributions from your taxes now, while a Roth IRA lets you withdraw tax-free in retirement — the right choice depends on your current and expected future tax situation.
- After opening the account, you decide how to invest the money — options range from money market funds and CDs to stocks and mutual funds, depending on the institution and your risk tolerance.
- You cannot withdraw money penalty-free before age 59½ in most cases, so an IRA is meant to stay untouched until retirement.
Choosing between a Traditional IRA and a Roth IRA
The choice between these two comes down to taxes now versus taxes later. With a Traditional IRA, you may deduct your contribution from your income on your tax return the year you make it, which lowers your taxable income and potentially your tax bill. You do not pay taxes on the growth inside the account either. But when you withdraw money in retirement, you pay income tax on the full amount — both what you contributed and what it earned.
With a Roth IRA, you contribute money you have already paid taxes on, so you get no tax deduction now. But the money grows tax-free, and when you withdraw it in retirement (after age 59½ and after the account has been open for at least five years), you owe no taxes on any of it. This is especially valuable if you expect to be in a higher tax bracket in retirement, or if you want to leave money to heirs without them facing a large tax bill.
There is one important limit on Roth IRAs: if your income is above a certain threshold, you cannot contribute directly to one. For 2024, that threshold is $146,000 for single filers and $230,000 for married couples filing jointly (these numbers change each year). If your income exceeds the limit, you can still open a Traditional IRA with no income restriction. Some people use a strategy called a "backdoor Roth" to get around the income limit, but that involves more steps and is worth discussing with a tax professional.
Where to open an IRA account
You can open an IRA at most banks, credit unions, and investment brokerages. Large institutions like Fidelity, Vanguard, Charles Schwab, and E-Trade all offer IRAs. Your own bank or credit union likely does too. The main difference between them is the investment options they offer and the fees they charge.
If you want to keep things straightforward and are not sure how to invest, a bank or credit union IRA may be easiest — you can put money into a savings account, money market account, or CD (certificate of deposit) within the IRA, and the money is insured by the FDIC up to $250,000. The downside is that these options typically earn very little interest.
If you are willing to invest in stocks or mutual funds, a brokerage like Fidelity or Vanguard gives you many more options and often lower fees. Many brokerages now offer IRAs with no minimum opening balance and no annual account fees. Before you choose, compare the investment options available, any account fees, and whether they offer educational resources if you are new to investing.
The step-by-step process to open an account
Opening an IRA takes about 15 to 30 minutes and can be done online, by phone, or in person. Here is what to expect:
- Choose the institution. Decide whether you want to open at a bank, credit union, or brokerage based on the investment options and fees that matter to you.
- Gather your information. Have your Social Security number, date of birth, address, and employment information ready. If you are self-employed, have your business name and structure (sole proprietor, LLC, etc.) available.
- Start the process. Go to the institution's website or call their IRA department. Most institutions let you start online and finish over the phone, or complete the whole process online.
- Choose IRA type. Select Traditional or Roth based on your tax situation. The institution may ask questions about your income to confirm you are may be able to access for the type you chose.
- Set up funding. Decide how you will get money into the account — a one-time transfer from your bank, automatic monthly contributions, or a rollover from another retirement account. Provide your bank account information if you are setting up a transfer.
- Choose your investments. If you opened at a brokerage, select how the money will be invested (mutual funds, individual stocks, target-date funds, etc.). If you opened at a bank, choose between savings, money market, or CD options.
- Review and sign. Read through the account agreement and disclosures, then sign electronically or print and mail the forms back.
- Fund the account. Transfer money in. The institution will provide instructions for how to do this — usually a bank transfer that takes one to three business days.
Once the account is open and funded, you are done. The money starts growing when ready, and you do not have to do anything else unless you want to change your investments or add more money later.
Contribution limits and how much you can put in
The IRS sets an annual limit on how much you can contribute to an IRA. For 2024, the limit is $7,000 per year if you are under age 50, and $8,000 per year if you are 50 or older (the extra $1,000 is called a "catch-up contribution"). These limits change periodically, so check the IRS website or ask your institution what the current year's limit is.
The limit applies across all IRAs you own — if you have both a Traditional and a Roth, your combined contributions cannot exceed the annual limit. You can contribute less than the limit, or nothing in a given year, with no penalty. You can also contribute at any time during the year, or even wait until the tax filing important date (usually April 15 of the following year) to make a contribution for the previous year.
There is no limit on how much total money can be in an IRA — only on how much you can add each year. If your account grows to $500,000, that is fine. The limit is only on new contributions.
What happens after you open the account
After your IRA is open and funded, the account works in the background. Your money is invested according to your choices, and it grows over time. You receive statements from the institution showing your balance and any transactions.
You can add more money to the account at any time, up to the annual contribution limit. Many people set up automatic monthly transfers so they contribute a little bit each month rather than a lump sum. You can also change your investments at any time — if you want to move money from one mutual fund to another, you can do that without penalty or tax consequences.
The key rule to remember is that you cannot withdraw money before age 59½ without paying a 10% penalty on the amount withdrawn, plus income tax on it (in the case of a Traditional IRA) or on the earnings (in the case of a Roth IRA). There are a few exceptions — you can withdraw from a Roth without penalty to pay for a first home purchase (up to $10,000 lifetime), or from a Traditional IRA for certain education expenses or medical bills — but in general, the money should stay put until retirement.
If you change jobs or want to move your IRA to a different institution, you can do a rollover or transfer. A rollover means the old institution sends you a check, which you then deposit into the new IRA within 60 days. A transfer means the institutions move the money directly between accounts, which is simpler and has no time limit. Most institutions prefer transfers because they are faster and there is no risk you will miss the 60-day important date.
Tax deductions and filing your taxes
If you opened a Traditional IRA, you may be able to deduct your contribution on your tax return. Whether you can depends on your income and whether you have access to a workplace retirement plan like a 401(k). If you do not have a workplace plan, you can always deduct a Traditional IRA contribution. If you do have one, the deduction phases out at higher income levels (the exact numbers change each year).
When you file your taxes, you will report your IRA contribution on Form 1040 or Form 1040-SR. Your IRA institution will send you a Form 5498 in January showing how much you contributed the previous year — keep this for your records, though you do not send it to the IRS.
If you opened a Roth IRA, there is no deduction to claim now. You straightforward contribute after-tax money and move on. The tax benefit comes later, when you withdraw in retirement.
Frequently Asked Questions
Can I have both a Traditional IRA and a Roth IRA at the same time?
Yes, you can have both. However, your combined contributions to all IRAs cannot exceed the annual limit. If you contribute $4,000 to a Traditional IRA, you can only contribute $3,000 to a Roth that year (assuming the $7,000 limit for 2024). Many people use both to diversify their tax situation in retirement.
What if I do not have a job — can I still open an IRA?
You need earned income to contribute to an IRA. Earned income means wages from a job, self-employment income, or income from a business you own. Investment income, Social Security, or unemployment benefits do not count. However, if you are married and your spouse has earned income, you may be able to open a "spousal IRA" and contribute based on their income.
Can I withdraw money from my IRA before retirement?
You can withdraw from a Roth IRA anytime without penalty — you can take out the money you contributed (not the earnings) whenever you want. With a Traditional IRA, early withdrawals before age 59½ are subject to a 10% penalty plus income tax. There are exceptions for first-time home purchases, education expenses, and certain hardships, but these are limited and come with their own rules.
How long does it take to open an IRA?
Most institutions can open an account in 15 to 30 minutes online. The account is usually active the same day or the next business day. Funding the account (transferring money in) typically takes one to three business days depending on your bank.
What is the difference between an IRA and a 401(k)?
An IRA is an individual account you open yourself, while a 401(k) is offered by your employer. A 401(k) usually has higher contribution limits and may include employer matching (information programs). An IRA has lower limits but more investment choices and is portable if you change jobs. Many people have both — they contribute to their employer's 401(k) and also open an IRA for additional retirement savings.