Opening an IRA takes about fifteen minutes online, but the choices you make before you click submit, which account type, which firm, how you fund it, will shape your retirement for decades. Anyone with earned income can open one, and the money inside grows either tax free or tax deferred depending on the version you pick.
Picking Between a Self Directed Account and a Robo Advisor
The first real decision is whether you want to choose your own investments or hand that job to a computer. Online brokers such as Fidelity, Charles Schwab and Merrill Edge let you build your own portfolio from stocks, bonds, mutual funds and ETFs. You get customer support for account setup, but the investment choices are on you. That works fine if you already know your way around a brokerage screen or you're willing to learn.
If picking individual investments sounds like a chore, a robo advisor might suit you better. These platforms use algorithms to build and manage a portfolio based on your goals, timeline and appetite for risk. You can open a robo IRA at a dedicated platform like Wealthfront or Betterment, or through a robo service run by a bigger firm, such as Schwab Intelligent Portfolios or Fidelity Go.
Four Types of IRAs and Who Each One Fits
Once you know how hands on you want to be, the next step is choosing the account type. Eligibility for each hinges on your income and whether you already have a workplace retirement plan.
A traditional IRA lets you contribute pretax dollars up to the yearly limit, and the balance isn't taxed until you withdraw it in retirement. You can pull out contributions penalty free after age 59 and a half, or earlier under certain special circumstances, but required minimum distributions kick in at age 73. This account tends to make more sense if you expect a lower tax bracket once you've stopped working.
A Roth IRA flips that arrangement: you contribute after tax money, and in general those contributions can't be withdrawn for five years, though you can take out your original contributions at any time, tax and penalty free. After age 59 and a half, all withdrawals come out clean. Earlier withdrawals face various conditions. Unlike the traditional version, Roth accounts carry no required minimum distributions.
Self employed people and small business owners have two more options. A SEP IRA lets an employer fund retirement accounts for themselves and their staff, with contributions capped at the lesser of 25% of an employee's salary or $69,000 a year for 2024. Once the money lands in the account, it behaves like a traditional IRA. A Simple IRA is open to businesses with 100 or fewer employees; once established, the employer must contribute every year, either 2% or 3% for matching purposes, while employees choose whether to chip in themselves. Workers need to have earned at least $5,000 in the prior two years and expect to earn that much again to qualify. The 2024 contribution ceiling is $16,000 for people under 50 and $19,500 for those 50 and older.
What the Paperwork Actually Requires
Opening the account itself is mostly a matter of proving you are who you say you are. Every provider has an