Starting an IRA: Open an IRA today

How do you set up an IRA?

Starting an IRA is a fairly straightforward process. Before forming an IRA, you will need to check your eligibility and figure out where to open an account. Once you have picked your institution, you will need to fill out the online or paper forms and submit them. If you choose to complete paper forms, you will need to have them delivered to the firm.

When you are creating an IRA, you will need to decide whether you will pick your own investments or will hire a professional to invest your money for you. You will then need to fund your account, which means that you will need to contribute money to it.

After forming an IRA, you will need to review your account on a regular basis and make adjustments when they are needed.

How much does it cost to open an IRA?

It is possible for you to find brokerages that charge low or zero costs to open an IRA. Many types of IRAs will also not have a minimum balance requirement for starting an IRA.

If you are wondering how to fund your account, you can do so in a couple of ways. You can set up automatic deposits from your checking account into your IRA account. You can also add funds by check or by direct deposit.

Where can I open an IRA?

There are a few options as to where to open an IRA. One option is with a traditional broker. However, traditional brokers charge high fees. When you are trying to determine how to choose the right IRA provider, you might want to consider a robo-advisor. These are typically computer programs that are programmed to advise investors according to their financial needs and goals by using algorithms. Using a robo-advisor will cost you less than starting an IRA with a traditional broker.

IRAs and retirement accounts in the U.S.

While most people do not have IRAs, these types of retirement accounts make up 25% of Americans savings. As long as they have taxable income, anyone can open an IRA, including minors.

You are also allowed to have more than one IRA as long as your aggregate contributions do not exceed the annual IRA contribution limits. Finally, a majority of IRA owners rely on professionals when they are planning for retirement.

What is an IRA?

An individual retirement account or IRA is an investment account that is specifically geared towards saving for retirement. This type of investment account provides you with specific types of tax advantages and benefits. There are seven types of IRAs, including the following:

  • Traditional IRA
  • Roth IRA
  • Nondeductible IRA
  • Spousal IRA
  • Self-directed IRA

Traditional and Roth IRAs are two types of individual retirement accounts, and the tax benefits that they offer are different from each other. When you contribute to a traditional IRA, your contributions come from pre-tax dollars.

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By contrast, Roth contributions are made with after-tax dollars. When you make contributions to a Roth account, your future withdrawals will be tax-free as long as you comply with the laws and regulations that govern Roth IRA accounts.

Traditional IRAs vs. Roth IRAs Table

Traditional IRAsRoth IRAs
Tax rulesContributions made pre-tax; pay taxes at disbursementsContributions made after-tax; disbursements are tax-free
Contribution amountLimited to $7,000 per year for people under age 50Limited to $7,000 per year for people under age 50
Catch-up contributions$1,000$1,000
Penalties on withdrawalsBefore 59 1/2 of 10%Before 59 1/2 of 10%, but some withdrawals are exempt
Required minimum distributionsBeginning after age 70 1/2None

There are a range of IRAs that you may be eligible for to choose from. Each has its own requirements and rules regarding the specific IRA type and withdrawals permitted. The following includes an overview of a few IRAs that are available.

A simplified employee pension IRA or SEP IRA is an individual retirement account that is employer-sponsored. A nondeductible IRA is a type of IRA for which the contributions are nondeductible. This is because your contributions are funded with your after-tax income.

A spousal IRA is a type of IRA that allows you to make contributions on behalf of your non-working spouse. This IRA allows you to get around the IRA income requirements.

The savings incentive match plan for employees or a SIMPLE IRA is an employer-sponsored IRA that is designed for smaller companies that have less than 100 employees. A self-directed IRA is an IRA that allows you to control the securities that you want to invest in. It offers many additional investment choices, including private market securities, real estate, stocks, bonds, ETFs, mutual funds, and others.

What are the general rules that must be followed for how to open an IRA?

If you are interested in starting an IRA, you should start by checking the rules to make sure that you are eligible. Most working people are allowed to contribute to a traditional IRA as long as you earn a taxable income and are younger than 70 ½.

For a traditional IRA, you will need to be aware of the required minimum distribution or RMD rules. RMDs are required minimum withdrawals that you must begin taking after you reach age 70 ½.

Under IRS rules, you must start taking your required minimum distributions beginning on April 1 of the year after you turn 70 ½. For each year after that, you must take them by Dec. 31. If you fail to take your RMD, you will be penalized at 50% of the amount that should have been withdrawn.

If you inherit an IRA from someone who dies, the inherited IRA will be a part of the deceased person’s estate. Inherited IRAs that are bequeathed may hold multiple types of assets, and they may be subject to different rules that depend on the circumstances of the beneficiaries.

For 2024, the IRA contribution limits for traditional and Roth accounts cannot exceed $7,000 per year if you are under age 50. If you are age 50 or older, the IRA contribution limits state that you cannot contribute more than $8,000 to your traditional or Roth account.

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Where to open an IRA

When you are looking into starting an IRA, you will need to determine which type of account you want to open. You can then research different institutions that offer IRAs, including the following:

  • Banks and credit unions
  • Investment accounts
  • Mutual fund companies
  • Online brokers
  • Others

You will want to pay attention to any fees that might be charged when you are starting an IRA. This should weigh in heavily when choosing where to open an IRA. Small fees can add up over time and eat into your retirement savings.

Funding an IRA

When you are starting an IRA, you might wonder how much money you will need to open an IRA. The amount of money that you will need will depend on the provider that you have chosen. Some providers require low minimum opening deposits and charge low or no fees.

You can fund your IRA from your paycheck by asking for automatic transfers to occur. The transfers can be paid directly into your IRA account. You can also set up automatic transfers from your bank account into your IRA or deposit money via a wire transfer or a check.

What kind of an IRA investor are you?

When you are preparing to open your first IRA, you will want to determine the type of investor that you are. Active investors tend to be high-fee because of the many trades and pay higher fees through traditional brokers. They pay fees per trade and consequently pay numerous fees. Active investors that are low-fee pay lower fees when they trade stocks by using online platforms.

Passive investors can be high or low fee investors as well. Those that pay high fees have accounts with brokerages that charge management fees and commissions. Those who pay low fees open accounts with providers that charge low or no fees to invest. Semi-passive investors with M1 Finance are not charged any fees for starting an IRA.

Robo-advisors use algorithms and automated portfolios and charge low or no fees. By contrast, traditional brokerages charge commissions and management fees that can eat into your contributions.

You will also need to determine how much risk you can tolerate in your portfolio. Conservative investors who are creating an IRA tend to be closer to their retirement dates. They may choose lower risk investments such as bonds. Aggressive investors are younger investors who are able to tolerate higher risks because they have longer periods of time to invest. You can use online tools to figure out your own risk tolerance.

How to roll over an IRA

You are able to roll other retirements into an IRA account. For example, a rollover 401(k) occurs when you roll the funds in a 401(k) account from a former employer into a traditional IRA account. Direct rollovers occur when the funds from your rollover 401(k) are transferred directly from your 401(k) account into your new IRA.

Indirect rollovers occur when you cash out your old retirement account and reinvest the money into a new plan within 60 days. A trustee-to-trustee transfer is an IRA rollover in which the financial institution that holds your old retirement account makes the payment directly from the account to a different IRA or a different retirement plan.

You can do this when you want to switch brokerage accounts or want to divide a large IRA into smaller accounts. Taxes will not be withheld from the transfer amount. The transfer will not have to comply with the one-per-year IRA rollover rule. Finally, transfers made in a trustee-to-trustee transfer IRA rollover do not count towards your annual IRA contribution limits.

Under the 60-day IRA rollover rule, you must reinvest the money that you withdraw from your account in the form of a check that is paid to you within 60 days. You then rollover an IRA by depositing them into your new IRA account. If you fail to make the deposit, you will have to pay a 10% withdrawal penalty and will be taxed on the amount that you have withdrawn.

Under the IRS one rollover per year rule, you can only complete a single rollover from an IRA to a different IRA in a 12-month period. If you have several different IRAs, they are aggregated and treated as if they are a single IRA. The one-per-year rule does not apply to rollovers from traditional IRAs to Roth IRAs, IRA-to-plan rollovers, trustee-to-trustee transfers, and plan-to-plan rollovers.

A rollover that does not comply with the one-per-year rule and that does not meet one of the previously listed exceptions is considered to be ineligible. If it exceeds the IRA contribution limits, it will be considered to be an excess contribution.

For funds in a Roth account, distributions can only be rolled over to a different Roth account. When you are rolling funds over from a 401(k), you move the money from the 401(k) at your former job to your IRA account.

You are allowed to transfer 401(k) assets into a Roth or traditional IRA. There are several reasons to roll over your 401(k). Depending on the IRA, your assets can continue to grow on a tax-free or a tax-deferred basis. IRAs give you greater choices of investments than 401(k) plans do. 401(k) plans give you the choice of some mutual funds. By contrast, IRAs allow you more options, including the following:

  • Mutual funds
  • Individual stocks
  • Bonds and bond funds
  • ETFs

When you open your first IRA, you can combine several retirement accounts into it. You will be allowed to buy and sell at any time. Most 401(k) plans limit the rebalancing of your portfolio each year. Once you roll the funds over, you will have easier access than if you had simply left the funds at your old employer.

You should roll over your 401(k) when the following occurs:

  • Left your old job
  • Multiple 401(k) accounts
  • Close to retirement

Most people are eligible to convert their 401(k) accounts to Roth IRAs. 401(k) plans have different rules and requirements, so you will need to check your plan’s terms.

If you inherit an IRA from your spouse, you are able to roll over the funds into an account in your name and to treat the assets as if they are your own. This gives you more control over the taxes and the distributions.

If you inherit a traditional IRA from someone other than your spouse, you are not allowed to roll it over or to roll other funds into it. You will be required to follow the RMD rules and to withdraw the funds from the inherited IRA within a set time period.

Checklist and summary on how to set up an IRA

Here is a checklist for starting an IRA:

  1. Decide how much help you want
  2. Choose where to set up your IRA
  3. Pick a traditional or Roth IRA
  4. Fund your account
  5. Choose your investments
  6. Make weekly or monthly contributions
  7. Automate your contributions
  8. Check your IRA account at least yearly
  9. Automate your investment choices with robo advisors

A great feature of IRAs is the IRA funding deadline. You can fund a traditional IRA up until the tax deadline for it to count for the prior year. The IRA funding deadline can help you to minimize your taxes.

Starting an IRA is a smart choice because of the tax benefits that you can reap. When you choose M1 Finance, you can benefit from an online broker that combines the smart algorithms of a robo advisor together with key principles of investing.

Smart IRA investors choose M1 Finance

M1 Finance has a top reputation as a leading broker. It is chosen by smart IRA investors because it doesn’t charge fees or commissions and combines cutting-edge technology with expert investing principles. You can roll over all of your current IRAs and 401(k)s for free with M1 Finance and stop paying IRA fees when you move to M1 today.

M1 offers the ability to invest for free in a way that is simple and secure. Maximize your IRA benefits at M1 Finance. When you choose M1, you can say goodbye to confusing costs and hidden fees.

Open your M1 account now

When you open your IRA account, you can select investments according to your level of risk tolerance. If you don’t feel comfortable making your own choices, we have more than 80 portfolios available that have been designed by experts for people who have different levels of risk, financial objectives, and time horizons.

M1 has powerful award-winning automation tools that can help you to easily understand investing. You can rely on its automatic features to help you to grow your savings without effort.