Opening an investment or retirement account can be quite simple, quick, and easy.  Here are a few steps for opening your IRA.

How to Open an IRA

  1. Decide what type of IRA is best for you
  2. Decide where to open your IRA
  3. Gather your documents
  4. Transfer money to your account
  5. Set up a recurring investment plan

1.  Decide what type of IRA is best for YOU

There are two types of IRAs:  Roth IRAs and Traditional IRAs.  They are both retirement accounts, but they have a few differences.

Roth IRAs

First things first, you may only contribute to a Roth IRA if your modified Adjusted Gross Income is less than $133K for single tax payers and $196K for married or joint filers.

Roth IRAs are not tax deductible.  That means whatever contribution you make comes from AFTER TAX money.  The benefit to this is that withdrawals after age 59½ are TAX-FREE.  Awesome!  If you plan to have an increasing tax rate in retirement, or if you would just rather not worry about tax implications in retirement, this may be the best plan for you. Another perk is that you can take withdrawals of your contribution amounts at any time, penalty-free, should you need to.  A major difference between a Roth IRA and a Traditional IRA is that you are not required to take any distributions from a Roth IRA at any age.  Therefore, you can decide to let your money grow long into retirement before you take your first distribution.

Roth IRAs are the most lenient in terms of what you can invest your money in.  You can invest your Roth IRA contributions in anything you want: index funds, lifecycle funds, individual stocks, or even alternative investments.

Traditional IRAs

Anyone with earned income can contribute to a Traditional IRA.  Traditional IRA contributions ARE tax deductible if you are not offered a retirement plan from your employer; otherwise, only certain amounts may be deducted.  This account allows your un-taxed earnings to grow until retirement.  It’s almost like the government is letting you borrow some capital with which to grow your investments. Favorited by self-employed individuals, you can use this as a way to decrease your taxable earnings.  The trade-off is that you pay taxes on distributions in retirement at your regular taxable rate.

Traditional IRA withdrawals can start as early as 59½, and they MUST begin at age 70.  Whereas a retiree at this age could allow their Roth IRA to continue growing, a Traditional IRA holder must start taking distributions.


Roth IRA and Traditional IRA holders may take a one-time only distribution of up to $10,000 dollars out of their account to assist in buying their first home;  Roth IRA holders must wait at least five years from the initial contribution date to do so.  Although this is an option, I’d recommend against it.  I believe that retirement is far too important to forgo, even for a house purchase.

2.  Decide where to open your IRA

Whenever I talk with people about opening retirement accounts, their main concern is usually focused around WHERE to open their account.  There are just too many options of financial institutions offering investment products.  For that reason you must ask yourself:

Are you experienced enough to run a self-directed retirement account? If so, you want to open your account at a trading firm such as Vanguard, Fidelity, or TD Ameritrade, where you can choose what to invest in.

If not, then you want to open a managed account at a Bank or Institution that will diversify your money into multiple asset classes that have been chosen based on a combination of historical performance, your risk tolerance, and expected returns for retirement.  This is by far the easier route— you may call it a “set it and forget it approach.”  Any bank will have an investment advisor that you can talk to in person, or information online on how to set up a retirement account with them.  You may also use a robo-advisor, like Wealthfront or Betterment.  These types of investment platforms have gained a lot of steam lately for several reasons.  Whereas big banks charge fees around 1.5% of your total assets under management every year to manage your account, the online investment platforms provide virtually the same service, using nearly similar asset diversification strategies, only charge fees around .25% per year.  There are some financial experts who believe that it is the fees charged, not the investments chosen, that will make the biggest difference in returns from one managed account to another.  In addition to lower fees, robo-advisors are more likely to provide tax-saving investment strategies for investors of any net worth, saving you money on your yearly taxes.  Large institutions usually limit these strategies to high net worth individuals or those with accounts of $250k+.  Ultimately, it is up to you to choose the institution that makes you most comfortable.  If you need a person to talk to on a regular basis, an advisor at a bank could be the person for you.

3.  Gather your documents

Once you’ve decided where you’re going to open your account, it’s time to begin the process.  Most of the locations will provide you with an online application that you can complete at home, but if you would rather go to a physical location, you’ll want to be sure to bring a few things with you.

What you’ll need to open your account:

  • Your social security number
  • Your photo ID or passport
  • Your bank account information (routing number and account number)
  • Your employment information (employer’s name and address)
  • Initial deposit (depending on the location you may need to bring $25+ in order to open and fund the account)

4.  Transfer money to your account

If you opened a self-directed account, it may take a few days before the deposit settles and before you can start trading or choosing what to buy in your account.  If you opened a managed account, your advisor will diversify your capital according to your preferences in your application or meeting when you opened your account.

5.  Set up a recurring contribution

This is one of the best ways to stay on track and to take advantage of the ever-changing market prices.  We all know that markets go up and down daily (well actually every single second), and it’s virtually impossible to time the market.  However, if you set up a plan where you invest $50, $100, or $200 weekly, monthly, etc, you’ll buy when prices are high, and you’ll buy when prices are low.  This is called Dollar-Cost Averaging, and it assures that you will get a good average price that will continue to compound as you approach retirement age.

Before Investing

Remember that all investing has risk involved, and the best way to achieve good returns is by letting your money compound for many years.  Keeping that in mind, it is vital that the money you are investing is money that you truly will not need in the near future.  Financial guru Suze Orman recommends having 6 to 12 months of living expenses saved in an Emergency Savings Fund prior to investing a single cent.  That way, you can weather any unexpected job loss or emergency, should one arise.

One huge benefit of retirement accounts worth less than $1 Million, is that your money is safe against creditor’s claims in lawsuits or bankruptcy (with a few exceptions).  Therefore, even if you run out of other options, you may be better off filing bankruptcy and saving that retirement money for what it’s truly designated for— retirement.


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