You open an IRA with a brokerage, fund it, then buy investments within it

An IRA is a container — a tax-advantaged account that holds investments. You do not invest "in" an IRA the way you invest in a stock. Instead, you open an IRA account at a brokerage or bank, transfer money into it, and then use that money to buy stocks, bonds, mutual funds, or other investments inside the account. The tax benefit comes from the account type (traditional or Roth), not from the investments themselves.

The process has three steps: choose where to open the account, fund it with money, and select what to buy with that money. Each step involves real choices that affect your costs and what investments are available to you.

Key Takeaways

  • You must open an IRA at a brokerage, bank, or robo-advisor before you can invest anything — the account itself is separate from the investments you buy inside it.
  • Annual contribution limits are set by the IRS and depend on your age and income; for 2024 the limit is $7,000 for most people under 50, and $8,000 for those 50 and older.
  • Once your account is funded, you can buy individual stocks, mutual funds, exchange-traded funds (ETFs), bonds, or target-date funds depending on what the brokerage offers.
  • Different brokerages charge different fees for account maintenance, trades, or fund management, so comparing costs before opening an account can save you hundreds of dollars over time.
  • You can only contribute money you earned from work in a given year, and contributions must happen by the tax filing deadline (usually April 15 of the following year).

Choosing where to open your IRA account

You can open an IRA at most brokerages, banks, and investment firms. Common choices include Fidelity, Vanguard, Charles Schwab, E*TRADE, and Merrill Edge, but credit unions and local banks also offer IRAs. Each institution charges different fees and offers different investment options, so the brokerage you choose affects both what you can buy and what it costs.

The main cost to compare is the fund expense ratio — the annual percentage you pay to hold a mutual fund or ETF. A fund charging 0.05% per year costs far less over time than one charging 0.50%, especially on large balances. Some brokerages also charge account maintenance fees (though many have eliminated these), trading commissions, or advisory fees if you use a robo-advisor or human advisor.

Start by listing three to five brokerages and comparing their expense ratios on funds you are interested in, any account fees, and whether they offer the type of account you want (traditional or Roth). Vanguard and Fidelity tend to have low expense ratios on their own funds, while Charles Schwab and E*TRADE offer broader fund selections. If you want hands-off investing, robo-advisors like Betterment or Wealthfront manage your account for you, though they charge advisory fees on top of fund expenses.

Funding your IRA with earned income

You can only contribute money you earned from work — wages, salary, self-employment income, or taxable alimony. You cannot contribute money from investments, inheritance, or unemployment benefits. The IRS sets an annual limit on how much you can put in, and it changes each year.

For 2024, the limit is $7,000 per year if you are under 50, and $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution). If you earned less than the limit that year, you can only contribute what you earned. For example, if you earned $5,000 in 2024, you can contribute at most $5,000 to your IRA.

You can contribute money anytime during the year or wait until the tax filing deadline — usually April 15 of the following year — to make your contribution for the previous year. Many people contribute in January to start the year with money invested, but there is no penalty for waiting until April. Once the money is in your account, you can invest it whenever you choose; you do not have to buy investments immediately.

Selecting investments to buy inside your IRA

After your money is in the account, you choose what to buy with it. The options depend on your brokerage, but most offer stocks, mutual funds, ETFs, bonds, and target-date funds. You can also hold cash in your IRA if you want to wait before investing.

For beginners, target-date funds are often the simplest choice. You pick a fund based on the year you plan to retire (for example, a 2050 target-date fund if you plan to retire around 2050), and the fund automatically shifts from stocks to bonds as you get closer to that date. The fund does the rebalancing for you.

If you want more control, you can build your own portfolio by buying a mix of low-cost index funds or ETFs. A common beginner approach is to buy a total stock market index fund (which holds thousands of stocks) and a total bond market index fund in a ratio that matches your age and risk tolerance — for example, 80% stocks and 20% bonds if you are young and have decades until retirement.

Individual stocks are also allowed in an IRA, but they require more research and carry higher risk than diversified funds. Most financial advisors recommend funds for people who do not have time to research individual companies.

Understanding contribution limits and income restrictions

The annual contribution limit applies to all your IRAs combined. If you have a traditional IRA and a Roth IRA, the total you can contribute across both accounts in one year is the limit — not the limit per account. For 2024, that total is $7,000 (or $8,000 if you are 50 or older).

Roth IRAs have an additional income limit. If your income is above a certain threshold, you cannot contribute directly to a Roth IRA. The threshold depends on your filing status and changes each year. For 2024, if you are single, the limit begins to phase out at $146,000 of modified adjusted gross income. If you are married filing jointly, it begins at $230,000. If your income is above the limit, you can still contribute to a traditional IRA, or you can use a "backdoor Roth" strategy (a more complex workaround that involves converting a traditional IRA to a Roth).

Traditional IRAs have no income limit for contributions, but if you or your spouse have a workplace retirement plan (like a 401(k)), the tax deduction for your traditional IRA contribution may be reduced or eliminated depending on your income.

Managing your investments over time

Once you have bought investments in your IRA, you do not have to do anything unless you want to. The investments will grow or decline based on market performance. Many people set up automatic monthly contributions — for example, $500 per month — so they invest steadily without having to remember to fund the account.

You should review your portfolio once or twice a year to make sure it still matches your goals and risk tolerance. If you chose a target-date fund, the fund rebalances itself automatically. If you built your own portfolio, you may need to rebalance manually — for example, if stocks have grown to 90% of your portfolio and you wanted 80%, you could sell some stocks and buy bonds to get back to your target.

Avoid the temptation to trade frequently or chase performance. IRAs are designed for long-term investing, and frequent trading can increase your costs and tax burden (though IRAs do shield you from capital gains taxes on trades within the account). The most successful IRA investors contribute regularly, keep costs low, and leave their money alone to compound over decades.

What happens when you withdraw money from your IRA

You can withdraw money from your IRA at any time, but the tax consequences depend on the account type and your age. With a traditional IRA, withdrawals before age 59½ are usually subject to income tax plus a 10% penalty, unless you may have access to for an exception (such as a first-time home purchase, up to $10,000 lifetime). After 59½, you can withdraw without penalty, though you still owe income tax on the money.

Roth IRAs have different rules. You can withdraw your contributions (the money you put in) anytime without tax or penalty. You can only withdraw earnings (the growth) before 59½ if you meet specific conditions, such as the account being open for at least five years and you being disabled. After 59½, you can withdraw both contributions and earnings tax-free.

Traditional IRAs require you to start taking withdrawals at age 73 (as of 2023; this age has been rising). Roth IRAs have no required withdrawals during your lifetime, which makes them useful for leaving money to heirs.

Frequently Asked Questions

Can I invest in real estate or cryptocurrency inside an IRA?

Most brokerages do not offer real estate or cryptocurrency directly in an IRA. However, you can hold real estate investment trusts (REITs) or cryptocurrency funds in some IRAs. A few specialized custodians allow self-directed IRAs that hold physical real estate or cryptocurrency, but these charge higher fees and require more paperwork. For most people, stocks, bonds, and funds are the practical options.

What is the difference between investing in a traditional IRA and a Roth IRA?

The investments you can buy are the same in both account types. The difference is in taxes: traditional IRA contributions may be tax-deductible now, and you pay tax when you withdraw. Roth contributions are made with after-tax money, but withdrawals in retirement are tax-free. Choose based on whether you expect to be in a higher or lower tax bracket in retirement, not based on the investments themselves.

Do I have to pick my investments right away after opening an IRA?

No. You can open an IRA, fund it, and leave the money in cash while you decide what to buy. However, cash earns very little interest, so most people invest within days or weeks. If you are unsure what to buy, a target-date fund is a reasonable temporary choice while you learn more.

Can I move money from one IRA to another?

Yes. You can transfer money between IRAs at different brokerages without tax or penalty. This is called a rollover or transfer. You can do this as many times as you want, which makes it easy to switch brokerages if you find lower fees or better investments elsewhere. Ask your new brokerage to handle the transfer directly so the money never passes through your hands.

What happens to my IRA if I change jobs?

Your IRA is separate from your job, so it stays with you. If your new job offers a 401(k), you can contribute to both the 401(k) and your IRA (up to the annual limits for each). If you want to move money from an old employer's 401(k) into your IRA, you can do a rollover, which is often a good idea because IRAs usually offer lower fees and more investment choices than 401(k)s.