Opening an IRA and making your first deposit

To invest in an IRA, you first open an account at a bank, credit union, or brokerage firm, then transfer or deposit money into it. The account itself is just a container — the IRA rules determine what you can put in it and when you can take money out. The money you deposit can then sit in savings, bonds, stocks, mutual funds, or other investments, depending on what the institution offers and what you choose.

You can open an IRA online, by phone, or in person. You will need your Social Security number, proof of identity (a driver's license works), and proof of address (a recent utility bill or bank statement). Most institutions let you open the account and fund it on the same day. Some let you fund it immediately online; others may require a few business days for the deposit to clear.

The two main types are a Traditional IRA and a Roth IRA. They have different rules about when you can deduct contributions from your taxes and when you can withdraw money tax-free. Which one makes sense depends on your income and whether you think you will be in a higher or lower tax bracket in retirement — a tax professional can help you decide, but the IRS website also walks through the basics.

Key Takeaways

  • You open an IRA at a bank, credit union, or brokerage, provide your Social Security number and ID, and can fund it the same day in most cases.
  • The money you deposit can stay in cash savings or go into stocks, bonds, and mutual funds depending on what the institution offers and what you choose.
  • A Traditional IRA may let you deduct contributions from your taxes now; a Roth IRA lets you withdraw money tax-free in retirement, but contributions are not tax-deductible.
  • You can only deposit money you earned from work (wages, self-employment income, or alimony), and annual deposit limits exist — currently $7,000 for most people under 50.
  • If your employer offers a 401(k) or similar plan, you may want to contribute there first to get any employer match before funding an IRA.

How much you can deposit each year

The IRS sets an annual limit on how much you can put into an IRA. For 2024, the limit is $7,000 if you are under 50 years old. If you are 50 or older, you can deposit an additional $1,000 as a "catch-up" contribution, for a total of $8,000. These limits change occasionally — the IRS announces the new limit each October for the following year.

The limit applies across all your IRAs combined. If you have a Traditional IRA and a Roth IRA, the $7,000 total is split between them, not $7,000 in each. You can deposit the full amount at once or spread deposits throughout the year — many people deposit monthly or quarterly.

You can only deposit money you earned from work. This includes wages from a job, net income from self-employment, or alimony received. You cannot deposit money from investments, inheritance, gifts, or unemployment benefits. If you did not earn income in a given year, you cannot make an IRA deposit that year.

Where your money goes once it is deposited

Once the money is in your IRA, you decide what to do with it. Some people leave it in a money market account or savings account within the IRA, earning a small amount of interest. Others use it to buy stocks, bonds, mutual funds, or exchange-traded funds (ETFs). The institution you chose will show you what options are available.

If you are not sure what to invest in, many institutions offer target-date funds — these are pre-built portfolios that automatically shift from stocks toward bonds as you get closer to retirement. You pick the fund that matches roughly when you plan to retire, and the fund does the rebalancing for you. This is a common choice for people starting out.

You can also move money between investments within your IRA without paying taxes or penalties. If you buy a mutual fund and later decide you want to move that money into a stock or bond instead, you can do that. The IRA rules only care about money coming in and going out of the account itself, not what happens inside it.

The difference between Traditional and Roth contributions

A Traditional IRA contribution may be tax-deductible in the year you make it, meaning you can subtract it from your income when you file taxes. This lowers your taxable income and often your tax bill. When you withdraw money in retirement, you pay income tax on it then. This makes sense if you expect to be in a lower tax bracket after you stop working.

A Roth IRA contribution is not tax-deductible — you pay taxes on the money before you deposit it. But when you withdraw money in retirement (after age 59½ and after the account has been open at least five years), you owe no tax on it, including the growth. This makes sense if you expect to be in a higher tax bracket in retirement, or if you want the flexibility of tax-free withdrawals later.

You cannot contribute to a Roth IRA if your income is above a certain threshold, which changes each year. For 2024, the limit phases out starting around $146,000 for single filers and $230,000 for married couples filing jointly — but these numbers change annually. There is no income limit for a Traditional IRA, though the tax deduction phases out if you or your spouse have a workplace retirement plan and earn above a certain amount.

Moving money from another retirement account into an IRA

If you have a 401(k) or similar plan from a previous job, you can move that money into an IRA without paying taxes or penalties. This is called a rollover. The process is straightforward: you contact the institution holding the old account, ask for a rollover to your new IRA, and they send the money directly to the IRA. This is the safest method because the money never touches your hands.

Some people receive a check from their old employer's plan instead. If you do, you have 60 days to deposit it into an IRA. If you miss that deadline, the money is treated as a withdrawal and you owe income tax plus a 10 percent penalty (unless you are over 59½). For this reason, it is better to ask the old plan to send the money directly to your IRA.

You can also convert a Traditional IRA into a Roth IRA, though you will owe income tax on the amount converted in that tax year. This is called a Roth conversion and makes sense in some situations — for example, if you have a year with unusually low income. A tax professional can help you decide whether it makes sense for you.

What happens if you withdraw money before retirement

IRAs are designed for retirement, so the IRS discourages early withdrawals. If you withdraw money before age 59½, you generally owe income tax on it plus a 10 percent penalty. For a Traditional IRA, you pay tax on the full amount withdrawn. For a Roth IRA, you pay tax and penalty only on the earnings; money you contributed comes out tax-free.

There are a few exceptions where you can withdraw without the 10 percent penalty: a first-time home purchase (up to $10,000 lifetime), certain medical expenses, health insurance premiums while unemployed, and a few others. You still owe income tax on the withdrawal unless it is a Roth contribution. The rules are complex, so check with a tax professional before withdrawing early.

At age 73, you must begin taking required minimum distributions (RMDs) from a Traditional IRA — the IRS calculates how much based on your age and account balance. Roth IRAs have no RMD requirement during your lifetime, which is another reason some people prefer them. If you do not take the required amount, you owe a penalty on the shortfall.

Coordinating an IRA with your employer's retirement plan

If your employer offers a 401(k), 403(b), or similar plan, most financial advisors suggest contributing there first, especially if your employer matches contributions. An employer match is assistance programs — if your employer matches 50 cents on the dollar up to 6 percent of your salary, that is an immediate 50 percent return on your money. After you have captured the full match, then open and fund an IRA.

You can have both a workplace plan and an IRA at the same time. The annual contribution limits are separate — you can contribute $23,500 to a 401(k) in 2024 and also contribute $7,000 to an IRA in the same year (though the IRA deduction may phase out if you have a workplace plan and earn above a certain income). Many people do both.

If you are self-employed or a freelancer with no workplace plan, an IRA is often the best option. You can also open a SEP IRA or Solo 401(k), which allow much higher contributions — a tax professional can help you choose which fits your situation.

Frequently Asked Questions

Can I open an IRA if I do not have a job?

No, you need earned income to contribute to an IRA. This includes wages from employment, net self-employment income, or alimony. If you did not earn income in a year, you cannot make an IRA deposit that year. A spouse with earned income can sometimes open a spousal IRA for a non-working spouse — ask your institution about this option.

What is the difference between opening an IRA at a bank versus a brokerage?

A bank IRA typically offers savings accounts, CDs, and money market accounts — safe, predictable options with modest returns. A brokerage IRA lets you buy stocks, bonds, mutual funds, and ETFs, offering more growth potential but also more risk and complexity. Choose based on how hands-on you want to be and what level of risk you are comfortable with.

Can I change my mind and switch from a Traditional IRA to a Roth?

Yes, you can convert a Traditional IRA to a Roth IRA at any time. You will owe income tax on the amount converted in that tax year, but the money then grows tax-free. Some people do this in years when their income is unusually low. A tax professional can help you decide if it makes sense for your situation.

What happens to my IRA if I change jobs?

Your IRA stays yours — it is not tied to your employer. You can keep it open and continue depositing to it, or roll your new employer's 401(k) into it when you leave that job. You can also roll money from your old employer's plan into the IRA if you have not already done so.

Do I have to invest the money, or can I just leave it in savings?

You can leave it in a savings account or money market account within the IRA if you want. The money will earn interest, though usually a small amount. Many people do this while they are saving up to reach a larger balance, then move it into investments later. There is no rule saying you must invest — it is your choice.