The basic process: what happens when you open an IRA

Opening an IRA means choosing a financial institution, deciding which type of IRA fits your situation, filling out an account application, funding the account, and then choosing what to invest in. The whole thing usually takes 15 minutes to an hour, depending on whether you already know which institution you want and how much money you're putting in.

You don't need permission from anyone. You don't need to prove income or pass a credit check. The IRS has rules about who can contribute to each type of IRA and how much, but the bank or brokerage you choose will ask you about those things on the application form. If you don't meet the rules, they'll tell you before you fund the account.

The hardest part is usually not the paperwork—it's deciding where to open the account and what to invest the money in once it's there. The opening itself is straightforward.

Key Takeaways

  • You can open an IRA at a bank, credit union, or brokerage, and the process takes less than an hour in most cases.
  • You'll need to choose between a Traditional IRA and a Roth IRA based on whether you want a tax deduction now or tax-free withdrawals later.
  • The application asks for your Social Security number, income information, and employment status so the institution can verify you meet IRS rules.
  • You fund the account by transferring money from your bank account, and then you choose how to invest it—in stocks, bonds, mutual funds, or cash.
  • There are no income limits for Traditional IRAs, but Roth IRAs have income limits that change each year based on your filing status.

Step 1: Choose where to open your IRA

You can open an IRA at a bank, a credit union, or a brokerage firm. Each has a different feel and different investment options.

Banks and credit unions are the simplest if you want your money in savings accounts or certificates of deposit (CDs). You walk in, fill out a form, and your money sits in a savings account that earns interest. The interest rate is low, but there's no risk. Most banks let you open an IRA online in a few minutes.

Brokerages like Fidelity, Vanguard, Charles Schwab, and E*TRADE let you invest in stocks, bonds, mutual funds, and exchange-traded funds (ETFs). They also offer money market accounts and CDs. If you want to build a diversified portfolio, a brokerage is where most people go. Opening an account online takes about 10 minutes.

There's no penalty for opening an IRA at one place and moving it later. You can also have multiple IRAs at different institutions if you want, though most people keep one.

Step 2: Decide between a Traditional IRA and a Roth IRA

The two main types of IRAs work differently, and the choice depends on your tax situation now and what you expect later.

A Traditional IRA lets you deduct your contributions from your taxable income in the year you make them—meaning you pay less in taxes that year. The money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount. This works best if you expect to be in a lower tax bracket in retirement than you are now.

A Roth IRA doesn't give you a tax deduction when you contribute. The money grows tax-free, and when you withdraw it in retirement, you pay no tax on it at all. This works best if you expect to be in a higher tax bracket in retirement, or if you just want to lock in today's tax rate. Roth IRAs also let you withdraw your contributions (not the earnings) before retirement without penalty, which gives you flexibility.

The catch: Roth IRAs have income limits. If you earn above a certain amount, you can't contribute to a Roth directly. Traditional IRAs have no income limit, but if you're covered by a workplace retirement plan and earn above a certain amount, you can't deduct your Traditional IRA contribution. These limits change each year. The institution you choose will ask about your income and tell you what you're allowed to do.

Step 3: Fill out the application

Whether you apply online or on paper, the application asks for the same basic information: your name, address, Social Security number, date of birth, and employment status. You'll also answer questions about your income and whether you're covered by a workplace retirement plan.

The institution uses this information to verify that you meet IRS rules for the type of IRA you're opening. If you're opening a Roth and your income is too high, they'll tell you before you fund the account. If you're opening a Traditional IRA and you're covered by a workplace plan, they'll explain how much you can deduct.

You'll also choose whether you want the account to be held in your name alone or jointly with a spouse. For most people, it's in one person's name only. You'll name a beneficiary—the person who inherits the account if you die. You can change this later.

Most institutions also ask whether you want to set up automatic contributions—transferring money from your bank account on a schedule. This is optional but helpful if you want to build the habit of saving.

Step 4: Fund the account

Once the application is approved, you transfer money into the account. You can do this by linking your bank account and transferring electronically, by mailing a check, or by rolling over money from another retirement account.

The money doesn't have to go in all at once. You can contribute throughout the year as long as you stay within the annual limit. For 2024, the limit is $7,000 per year for people under 50, and $8,000 for people 50 and older. These limits change periodically.

If you're moving money from another IRA or a workplace retirement plan, you can do a rollover. The money moves directly from one institution to another without you touching it, and there are no tax consequences. This is different from a withdrawal, which would trigger taxes and penalties if you're under 59½.

Step 5: Choose your investments

Once the money is in the account, you decide what to invest it in. At a bank, your options are usually savings accounts, money market accounts, and CDs. At a brokerage, you can choose individual stocks, bonds, mutual funds, ETFs, or keep it in cash.

If you're not sure what to invest in, many brokerages offer target-date funds—funds that automatically adjust from stocks to bonds as you get closer to retirement. You pick the fund based on the year you plan to retire, and the fund does the rest.

You don't have to decide immediately. You can leave the money in a money market account or cash while you think about it. But money sitting in cash earns very little, so most people move it into investments within a few days.

What you need before you start

Gather these items before you open an account: your Social Security number, your date of birth, your current address, and information about your employment and income. If you're rolling over money from another IRA or a 401(k), you'll need the account number and the name of the institution holding it.

You'll also need a bank account to fund the IRA from, unless you're mailing a check. Most institutions require a minimum deposit to open the account—often $0, but sometimes $500 or $1,000. Check the institution's website to see what they require.

Frequently Asked Questions

Can I open an IRA if I'm self-employed or have no job?

You can open a Traditional IRA with no income at all. For a Roth IRA, you need to have earned income in the year you contribute—money from a job, self-employment, or freelance work. If you're self-employed, you might also want to look into a SEP-IRA or Solo 401(k), which allow much larger contributions.

How long does it take to open an IRA?

Online applications usually take 10 to 15 minutes. The institution may take a day or two to verify your information and approve the account. You can usually fund it the same day or the next day. In-person applications at a bank or credit union take about 30 minutes.

Can I open an IRA if I already have a 401(k) at work?

Yes. You can have both a workplace 401(k) and an IRA at the same time. However, if you have a 401(k) and your income is above a certain level, you may not be able to deduct a Traditional IRA contribution. Roth IRAs have separate income limits. The institution will explain this when you apply.

What if I change my mind about which type of IRA I opened?

You can convert a Traditional IRA to a Roth IRA, though you'll owe taxes on the money being converted. You can also open a second IRA of a different type. There's no penalty for having multiple IRAs, but your annual contribution limit applies across all of them combined.

Do I have to invest the money right away?

No. You can leave the money in a money market account or cash sweep account while you decide. However, cash earns very little interest, so most people move it into investments within a few days or weeks of opening the account.