Step-by-Step Checklist to Opening an IRA

Step-by-Step Checklist to Opening an IRA article image.

Building a retirement nest egg is one of the most important financial moves you can make. An individual retirement account (IRA) can help. An IRA is a self-directed investment account you can use to save for retirement while minimizing taxes.

There are different types of IRAs, and it's important to select the right one for your financial situation. Use this checklist to understand your IRA options, choose a provider and open your IRA.

Before You Invest

Deciding to invest in an IRA will depend on your other retirement options, your employment situation and whether you are investing for yourself or yourself and your spouse. Find your situation below and go from there.

  • Your employer doesn't offer a retirement plan. In this case, an IRA is one of your best options for building retirement savings.
  • Your employer offers a retirement plan such as a 401(k). Even if you contribute to your company's 401(k) plan, you can also invest in an IRA. An IRA can help you diversify investments or save more than your 401(k) allows. Things to keep in mind:
    • If you or your spouse contribute to an employer-sponsored 401(k), you may not be able to deduct all your contributions to a traditional IRA from your taxes.
    • If the employer matches a percentage of 401(k) contributions, fund the 401(k) up to the employer match amount before opening an IRA.
  • You recently left a job that had an employer-sponsored 401(k) or are planning to. In this situation, consider a rollover IRA.
    • A rollover IRA allows you to transfer the savings in your employer-sponsored 401(k) plan when you leave or change jobs.
    • Some employers let you keep funds in their 401(k) after you leave, but a rollover IRA can reduce fees and give you more control over your investments.
  • Your spouse doesn't work. You can fund a spousal IRA for your non-working spouse with your income. This increases the total amount you can save.
  • You own your own business. Consider a SEP-IRA or SIMPLE IRA. Both plans are available whether you are a one-person business or have employees, and both allow you to save more than the annual limit for traditional and Roth IRAs. Your accountant or financial advisor can help you determine whether an SEP-IRA or SIMPLE IRA is best for your situation.
    • SEP-IRA (Simplified Employee Pension): Employers may contribute for eligible employees (including themselves). Employees manage their plans but cannot contribute.
    • SIMPLE IRA (Savings Incentive Match Plan for Employees): Employees manage their plans and can contribute. Employers must contribute for eligible employees (including themselves).

Decide Between a Roth IRA and a Traditional IRA

If an IRA looks like a good option for you, you'll need to choose between a traditional IRA and a Roth.

  • Traditional IRA: Contributions are made pretax and are tax-deductible depending on your income and whether you have an employer-sponsored retirement plan.
    • Because you don't pay tax on contributions until you begin taking withdrawals after age 59½, traditional IRAs are especially good for high earners looking to reduce their current taxable income.
    • You must start taking distributions from the IRA by April 1 of the year after the calendar year you turn 70½ (or 72 if your 70th birthday was July 1, 2019, or later).
  • Roth IRA: Contributions are made with post-tax dollars and are not tax-deductible.
    • Because you contribute to Roth IRAs with after-tax dollars, you pay no tax on withdrawals made after age 59½. For that reason, Roth IRAs can be a good option for people just starting their careers who have a lower income tax bracket than they may later.
    • You are never required to take distributions; you can even leave the IRA to a beneficiary.

The following table compares the differences between Roth and traditional IRAs.

IRA Comparison
Roth IRATraditional IRA
Maximum annual contribution (2020)$6,000 ($7,000 if age 50 or over by end of year)$6,000 ($7,000 if age 50 or over by end of year)
Maximum income allowance$139,000 for individuals filing as single; $206,000 for married couples filing jointlyNone
Contributions tax-deductible?NoMaybe, depending on your income and whether you have a retirement plan at work
Withdrawal of contributions subject to income tax?NoYes
Withdrawal of fund earnings subject to income tax?Maybe, if withdrawals are made before age
59 1/2
Yes
Early withdrawal penalty?Some withdrawals of fund earnings made before age
59 1/2 are subject to 10% penalty
10% penalty on some withdrawals made before age
59 1/2
Age restriction on contributionsNone70 1/2
Age when distributions become mandatoryNone70 1/2

Determine How Much You Can Contribute Each Month

To calculate your monthly contribution to your IRA, answer these questions:

  • How much do I need to save for retirement?
    • Experts recommend putting at least 15% of your gross income into retirement savings, but you may need to save more depending on your desired retirement age and lifestyle.
    • Investment firms including Charles Schwab, Fidelity, T. Rowe Price and Vanguard have online calculators you can use to estimate retirement needs.
  • How much can I afford to contribute?
    • Create a budget that allows for a monthly IRA contribution.
    • Fund an IRA as early as you can. Starting your IRA just a few years earlier can make a big difference at retirement. If you put the maximum amount ($6,000 annually for 2020) into a traditional IRA starting at age 25, at 65 you would have $1,308,545. If you waited until age 35 to start contributing the maximum, at age 65 you'd have $633,326.
    • Use the AARP IRA Calculator to project your potential IRA returns.
  • What is the plan's annual contribution limit?
    • Aim to make the maximum allowable annual contribution to your IRA.
    • You can contribute to an IRA up to April 15 for the previous tax year.

Choose an IRA Provider

You can open an IRA with many types of financial institutions, including banks, credit unions, investment brokerages and mutual fund providers. Providers generally offer three options:

  • Self-managed: You select and manage your own investments. These funds are best for sophisticated investors and typically charge lower fees.
  • Automated "robo-advisor": You choose from a menu of portfolios (or answer a questionnaire) tailored for different risk tolerances, life stages and goals, and the robo-advisor uses that information to create and manage your investments. The automated digital platform is based on complex algorithms and requires little, if any, human interaction. These funds typically charge lower fees and are a good choice if you don't want to manage your own IRA but also don't want to pay for professional management.
  • Professionally managed: A dedicated portfolio manager selects and manages investments for you based on your risk tolerance, age and goals. These funds charge higher fees and are good for high-net-worth investors, investors with complex financial holdings or those seeking personalized advice.

Questions to Ask IRA Providers

  • What are the fees?
    • Fees to open and manage the account
    • Per-transaction or per-trade fees
    • Fees for customer service calls
  • Is there a minimum initial investment?
  • Are you required to maintain a certain minimum balance?
  • How is customer service provided (phone, chat, email)?
    • What hours is customer service offered and how quickly can you expect a response?
    • Will your questions be answered by a dedicated advisor or by various customer service agents?
  • What are the firm's credentials and qualifications? Visit the Securities and Exchange Commission for guidance on investigating a firm or advisor.

Open an IRA

  • Complete documents required by the provider. You can usually do this online.
  • If required, make an initial deposit to open the IRA. Some IRAs can be opened with a zero balance.
  • Set up ongoing deposits. These will come directly from your paycheck or bank account.
  • Select investments. You do this yourself or with help from the provider depending on which account management option you choose. Select investments based on your age, retirement goals and risk tolerance.

Managing Your IRA

  • Commit to contributing to your IRA every month. If possible, try to fund your IRA up to the maximum allowable contribution.
  • Monitor your investments and update your portfolio as needed. Depending on your IRA, your advisor may do this for you, your investments may update automatically, or you may do it yourself.

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