Open and fund an Individual Retirement Account by choosing between Traditional and Roth, selecting a custodian, picking investments, designating beneficiaries, and understanding tax rules.
Understand Traditional IRA: tax-deductible contributions, taxed withdrawals
A $7,000 Traditional IRA contribution in the 22% tax bracket reduces your tax bill by $1,540 this year. You pay income tax when you withdraw in retirement, ideally at a lower rate.
A $7,000 Roth contribution grows tax-free. At 7% annual returns over 30 years, that single contribution becomes $53,000—all withdrawable tax-free. Roth is powerful for younger savers in lower tax brackets.
Check Roth IRA income eligibility limits
For 2024, single filers can contribute fully to a Roth IRA with income under $146,000 (phaseout starts at $146,000, ends at $161,000). Married filing jointly: full contribution under $230,000, phaseout to $240,000.
Check Traditional IRA deductibility rules if you have a workplace plan
If you're covered by an employer plan, Traditional IRA deductions phase out at $77,000-$87,000 (single) or $123,000-$143,000 (married filing jointly) for 2024. Above these limits, contributions are non-deductible.
Decide which type fits your current and expected future tax situation
Earning $45,000 in the 12% bracket? Roth is almost always better. Earning $150,000 in the 24% bracket with a workplace plan? Traditional IRA (if deductible) or backdoor Roth may make more sense.
Understand Contribution Limits
Know the annual contribution limit ($7,000 for 2024, $8,000 if age 50+)
This limit is combined across all Traditional and Roth IRAs. You cannot contribute $7,000 to a Traditional AND $7,000 to a Roth in the same year. The total across all IRAs is $7,000.
Confirm you have enough earned income to contribute
IRA contributions require earned income (wages, self-employment, tips). Investment income, rental income, and Social Security don't count. Your contribution cannot exceed your earned income for the year.
Know the contribution deadline: April 15 of the following year
You can make 2024 IRA contributions until April 15, 2025. This gives you extra time to fund your IRA after reviewing your tax situation. When contributing after January 1, specify which tax year it applies to.
Select a Custodian
Compare online brokerages for account fees and fund availability
Major brokerages charge $0 for IRA accounts and $0 for stock and ETF trades. The key differentiator is fund selection and minimum investment requirements. Most offer thousands of mutual funds and ETFs.
Check for account minimums and transaction fees
Some brokerages require $0 to open an IRA while others need $1,000-$3,000. Mutual fund minimums vary from $0 to $3,000 per fund. ETFs can typically be purchased with no minimum beyond the share price.
Verify the custodian is SIPC-insured (up to $500,000 in securities)
SIPC insurance protects your securities and cash if the brokerage fails—not against market losses. All major U.S. brokerages are SIPC members. Verify at sipc.org before opening an account.
Open the account online with your Social Security number and bank details
Account opening takes 10-15 minutes online. You'll need your SSN, employer information, and a bank account for funding. Most accounts are approved instantly and ready for funding the same day.
Choose Your Investments
Start with a diversified index fund or target-date retirement fund
A total U.S. stock market index fund with a 0.03% expense ratio gives you exposure to 3,000+ stocks for pennies. A target-date fund adds bonds and international stocks in one fund for slightly higher fees (0.10%-0.15%).
For a DIY portfolio, consider a three-fund approach
Split across a U.S. stock index (60%), international stock index (20%), and bond index (20%). This three-fund portfolio covers the entire global market. Adjust the stock/bond split based on your age and risk tolerance.
Keep total fund expense ratios under 0.20%
On a $100,000 IRA, a 0.03% expense ratio costs $30 per year versus $500 at 0.50%. Over 30 years at 7% growth, that difference compounds to roughly $50,000 in lost returns.
Set up automatic investing to contribute regularly
Auto-invest $583 per month to max the $7,000 limit by December. Dollar-cost averaging through automatic purchases removes the temptation to time the market and ensures consistent progress.
Designate Beneficiaries
Name a primary beneficiary for your IRA
The beneficiary designation on your IRA overrides your will. If your will says one thing and your IRA form says another, the IRA form wins. Make sure both documents agree.
Name a contingent beneficiary in case the primary cannot inherit
A contingent beneficiary inherits if your primary beneficiary passes away before you. Without one, the IRA may go through probate, which can take 6-12 months and incur legal fees of $2,000-$10,000.
Review and update beneficiaries after any major life event
Marriage, divorce, birth of a child, or death of a beneficiary all require updates. Set a calendar reminder to verify beneficiaries each January. An outdated designation is one of the costliest oversights in estate planning.
Understand Tax Rules and Withdrawal Restrictions
Know the early withdrawal penalty: 10% on top of income tax before age 59.5
Withdrawing $10,000 from a Traditional IRA at age 40 in the 22% bracket costs $2,200 in income tax plus $1,000 in penalties—$3,200 total. The Roth IRA lets you withdraw contributions (not earnings) penalty-free anytime.
Learn the Roth IRA 5-year rule for tax-free earnings withdrawals
Roth IRA earnings are tax-free only if the account has been open for at least 5 years AND you're 59.5 or older. Opening a Roth early starts the clock, even with a small initial contribution.
Know the Required Minimum Distribution (RMD) rules
Traditional IRAs require RMDs starting at age 73 (as of 2024). Roth IRAs have no RMDs during your lifetime, making them ideal for wealth transfer. Failing to take an RMD triggers a 25% penalty on the amount not withdrawn.
Keep records of all contributions for tax reporting
Track Roth contributions carefully—you can always withdraw them tax-free and penalty-free. Your custodian sends Form 5498 annually showing contributions, but maintaining your own records prevents disputes.
Frequently Asked Questions
What is the difference between a Traditional IRA and a Roth IRA?
Traditional contributions may be tax-deductible now, but withdrawals are taxed in retirement. Roth contributions use after-tax dollars but withdrawals are completely tax-free. The 2024 limit is $7,000 ($8,000 if 50+) across all IRAs combined. Choose Traditional if you expect a lower retirement bracket; Roth if same or higher. Many advisors recommend Roth for younger workers.
What are the income limits for IRA contributions?
Roth phases out at $146,000-$161,000 single and $230,000-$240,000 married (2024). Traditional deduction phases out at $77,000-$87,000 single with employer plan. High earners can use the backdoor Roth: contribute to non-deductible Traditional, then convert. Income limits adjust annually; verify with the IRS.
Where should I open an IRA?
Top custodians are Fidelity (zero-expense-ratio funds, fractional shares), Vanguard (pioneered indexing, lowest-cost target-date funds), and Schwab (most branch locations). All offer zero minimums and no account fees. Choose based on user interface preference and whether you value in-person access.
Can I contribute to both a 401(k) and an IRA?
Yes, limits are separate: $23,000 for 401(k) and $7,000 for IRA in 2024 ($38,500 total if 50+). With an employer plan, Traditional IRA deduction may be limited by income. The common strategy: contribute to 401(k) up to match, max Roth IRA, then increase 401(k) toward the limit.