You choose the investments; the IRA is just the container

An IRA is a tax-sheltered account, not an investment itself. Once you open one, you fund it with money, then you decide what to buy inside it — stocks, bonds, mutual funds, exchange-traded funds (ETFs), or other permitted assets. The IRA's job is to hold those investments and let them grow without triggering taxes on gains or dividends until you withdraw the money.

The actual investing happens through a brokerage or custodian — the financial institution that holds your account. You log in, place trades the same way you would in a regular taxable account, and the purchases sit inside your IRA wrapper. The tax advantage comes from the account structure, not from the investments themselves.

Key Takeaways

  • You must open an IRA with a brokerage or custodian before you can invest; the account itself is not an investment.
  • You fund the account with cash, then use that cash to buy stocks, bonds, funds, or other assets the custodian permits.
  • Different IRA types (Traditional, Roth, SEP, SIMPLE) have different contribution limits and tax rules, but the investing process works the same way inside each one.
  • Your choice of brokerage affects which investments are available to you and what fees you pay to trade.
  • You can move money between investments inside the same IRA without triggering taxes, but moving money between IRAs has strict rules.

Opening an IRA and funding it with cash

Start by choosing a brokerage or custodian. Major options include Fidelity, Vanguard, Charles Schwab, E-Trade, and Merrill Edge, though many others exist. Each one offers IRAs and lets you trade inside them, but they differ in which investments they offer, what fees they charge, and how their platforms work. Some specialize in low-cost index funds; others offer a wider range of individual stocks and options.

Once you pick one, you open an IRA account online or by phone. You will choose the type — Traditional, Roth, SEP, or SIMPLE — based on your income and employment situation. The brokerage will ask for your Social Security number, address, and employment information. This takes 10 to 20 minutes.

Then you fund the account by transferring money from your bank. You can do this by electronic transfer (usually free and takes one to three business days) or by mailing a check. The money sits in a cash position inside your IRA until you invest it. You are not required to invest immediately; you can hold cash and wait for the right time to buy.

Choosing what to buy inside your IRA

Once cash is in the account, you log into your brokerage and place trades. If you want to buy a mutual fund, you search for it by name or ticker symbol, enter the dollar amount or number of shares, and confirm. The same process works for stocks, ETFs, bonds, or other assets your custodian permits.

Most people starting out buy index funds or ETFs — baskets of stocks or bonds that track a market index like the S&P 500. These are simpler than picking individual stocks and offer built-in diversification. A single fund can hold hundreds or thousands of securities. Vanguard, Fidelity, and Schwab all offer low-cost index funds and ETFs with expense ratios (annual fees) below 0.10%.

If you prefer individual stocks, you can buy those too. The process is identical: search the ticker, enter the number of shares, and buy. Some brokerages charge a commission per trade (typically $5 to $10); others offer commission-free stock trading. Check your brokerage's fee schedule before you open the account.

You can also hold bonds, bond funds, CDs, or even real estate investment trusts (REITs) inside an IRA, depending on what your custodian permits. The key rule: whatever you buy must be a permitted investment. Collectibles, cryptocurrency, and life insurance are generally not allowed.

Moving money between investments without triggering taxes

One major advantage of an IRA is that you can buy and sell inside it without paying capital gains tax. If you buy a stock for $1,000, it rises to $2,000, and you sell it, you owe no tax on that $1,000 gain — as long as the money stays inside the IRA. This is true for Traditional IRAs, Roth IRAs, and all other types.

You can rebalance your portfolio as often as you want. If you started with 60% stocks and 40% bonds, and stocks have grown to 70% of your account, you can sell some stocks and buy bonds to get back to 60/40. No tax bill. This flexibility lets you adjust your strategy without the tax drag that would hit you in a regular taxable account.

The one restriction: you cannot move money between different IRAs more than once per year (per IRA type). If you have a Traditional IRA at Fidelity and another at Vanguard, you can transfer money between them, but only once in any 12-month period. If you exceed this limit, the excess is treated as a taxable distribution. Most people avoid this by consolidating IRAs at a single custodian.

Understanding contribution limits and annual funding

You cannot invest more than the annual contribution limit for your IRA type. For 2024, the limit for Traditional and Roth IRAs is $7,000 per year if you are under 50, and $8,000 if you are 50 or older. SEP IRAs and SIMPLE IRAs have much higher limits and are designed for self-employed people and small business owners.

You can contribute once per year, or you can split it into monthly or quarterly deposits — whatever fits your cash flow. Many people set up automatic monthly transfers of $500 or $600 so they do not have to remember to fund the account. The money goes into cash first, then you invest it.

If you earn income, you can contribute up to the limit. If you do not earn income (or earn less than the limit), you can contribute only up to what you earned that year. A spouse with no income can contribute to a spousal IRA if the working spouse earned enough to cover both contributions.

Tax treatment depends on your IRA type

In a Traditional IRA, contributions may be tax-deductible in the year you make them (depending on your income and whether you have a workplace retirement plan). The investments grow tax-free. When you withdraw money in retirement, withdrawals are taxed as ordinary income. You must begin taking required minimum distributions (RMDs) at age 73.

In a Roth IRA, contributions are made with after-tax money — you do not get a deduction. But the investments grow tax-free, and withdrawals in retirement are tax-free too. There are no required minimum distributions during your lifetime. Roth IRAs have income limits; if you earn above a certain threshold, you cannot contribute directly.

A SEP IRA is for self-employed people and small business owners. Contributions are tax-deductible, and you can contribute up to 25% of your net self-employment income, up to a much higher annual limit than a Traditional IRA. Investments grow tax-free, and withdrawals are taxed as ordinary income.

A SIMPLE IRA is for businesses with 100 or fewer employees. Employees can contribute, and employers must make matching or non-elective contributions. The rules are simpler than a 401(k), but contribution limits are lower than a SEP.

Fees and costs to watch

Your total cost depends on three things: the brokerage's trading commissions, the expense ratios of the funds you buy, and any account maintenance fees.

Most major brokerages now offer commission-free stock and ETF trading, so you will not pay per trade. Some still charge commissions on mutual funds or bonds; check before you open the account. Account maintenance fees are rare at large brokerages but may apply at smaller ones.

The biggest ongoing cost is the expense ratio of your funds. If you buy a Vanguard S&P 500 index fund with a 0.03% expense ratio, you pay $3 per year for every $10,000 invested. If you buy an actively managed fund with a 1% expense ratio, you pay $100 per year on the same $10,000. Over decades, this difference compounds significantly. For most investors, low-cost index funds are the better choice.

Moving an IRA to a different brokerage

If you want to switch brokerages, you can transfer your IRA without triggering taxes or penalties. This is called a direct transfer or trustee-to-trustee transfer. The old custodian sends the money directly to the new one; you never touch it. The process usually takes five to ten business days.

You can also do an indirect rollover, where the old custodian sends you a check and you deposit it into the new IRA within 60 days. This is riskier because if you miss the 60-day window, the money is treated as a taxable distribution. Direct transfers are safer and simpler.

When you move an IRA, your investments move with it. If you owned stocks at the old brokerage, they transfer as stocks. You do not have to sell and rebuy; the holdings simply move to the new account.

Frequently Asked Questions

Can I invest in individual stocks inside an IRA?

Yes, as long as your custodian permits it. Most major brokerages allow individual stock trading inside IRAs. You buy and sell the same way you would in a regular account, but gains are not taxed until you withdraw the money.

What happens if I invest money I did not earn?

You cannot contribute more than you earned in income that year. If you earned $4,000 in wages or self-employment income, you can contribute only $4,000 to an IRA, even if you have more cash available. A spouse with no income can contribute to a spousal IRA if the working spouse earned enough.

Can I withdraw money from my IRA to invest in something else?

You can withdraw money, but you will owe income tax on the withdrawal and possibly a 10% penalty if you are under 59½. Some exceptions exist — first-time home purchase, disability, medical expenses — but they are narrow. It is usually better to keep the money invested inside the IRA.

Do I have to pick my investments when I open the IRA?

No. You can open the account, fund it with cash, and leave the money sitting in a cash position while you decide what to buy. There is no penalty for holding cash inside an IRA, though cash earns very little interest.

What if I want to change my investments after I buy them?

You can sell and rebuy as often as you want inside the same IRA with no tax consequences. If you bought stocks and want to switch to bonds, you can sell the stocks and buy bonds the same day. The only restriction is moving money between different IRAs — you can do that only once per year.