Not quite sure how to start an IRA, or what options are best for you? Here are the steps, considerations, and questions to ensure success.
You’ve decided an individual retirement account (or IRA) is right for you. You’ve learned how they work and why they can be beneficial—from providing tax advantages and investment choices, to offering control over your savings and more. (Want a refresher? Check out these IRA basics.)
But maybe you’re not quite sure where to start. Here’s how to set up an IRA, along with some questions to ask yourself along the way.
1. Decide whether you want a traditional IRA or Roth IRA.
The main difference between a traditional and Roth IRA is when you pay taxes on your money. With a traditional IRA, you can deduct your contributions from your taxes the year you make the IRA contribution, which lowers your taxable income.1 Then, you pay taxes on the money you withdraw in retirement.
With a Roth IRA, you contribute using after-tax money (taxed based on your income at the time of contribution), without deducting those contributions from your taxes. Then when you withdraw your money in retirement, you don’t pay taxes on it, or on the earnings.2
If you’re not sure which type of IRA is right for you, ask yourself these questions:
When will a tax break benefit you the most?
If you’ll likely be in a lower tax bracket in retirement (for example, because you won’t be getting a paycheck anymore), a traditional IRA may be right for you. You’ll pay taxes on your money based on your income when you retire. If you think you’ll be in a higher tax bracket in retirement, a Roth IRA may be a better choice; you’ll pay taxes on it up front, based on your lower income.
What’s your current income?
You might not be able to contribute to a Roth IRA if you make over a certain income level, and there may be some limits on tax deductibility if your spouse has a retirement plan at work.
Roth IRA eligibility information, 2023
| Single filers | Joint filers | |
|---|---|---|
| Full contribution | Income less than $138,000 | Income less than $218,000 |
| Partial contribution | Income between $138,000 and $153,000 | Income between $218,000 and $228,000 |
| No contribution | Income over $153,000 | Income over $228,000 |
2. Research and select an IRA provider.
When you’re choosing between providers, think about the services and features you want―and how much they cost.
- Do they offer a wide range of investment options as your needs change—stocks, bonds, mutual funds, annuities, bank products, etc?
- Will they provide professional investment advice about which options are right for you now and in the future (if you want this service)?
- Are they friendly, knowledgeable, and accessible if you have questions? Do they offer ongoing education and support?
- Do they have a reputation of financial strength and integrity?
- What are the fees? Each IRA option will have different fees, such as investment fees and costs tied to different services that come with the account. You’ll want to carefully review the fees to make sure you get the services and features you want for the amount you’ll pay.
When you've decided on a provider, contact them to open your account—by phone, online, or with the help of a financial professional.
3. Select your investments.
Once you’ve decided which IRA will work best for you and you’ve selected a provider, it’s time to choose your investments. Investments can seem intimidating but a few simple questions can help you narrow down what you’re looking for.
Do you want some help with investment decisions? Or would you prefer to select and monitor your investments on your own?
If you’re a hands-off investor, some investment options are designed to rebalance your account automatically, so you don’t have to manage it yourself. Your IRA provider might offer these types of options.
Some IRA providers may provide professional investment advice and may monitor and rebalance the account for you on a regular basis. These services could be provided by a financial professional or an asset manager, including a robo-advisor.
If you’re an investor who likes a hands-on approach, you can choose to select your own investments―with or without the help of a financial professional.
How do you feel about risk when investing?
An IRA can give you access to a lot of different investment options—stocks, bonds, mutual funds, and exchange-traded funds, as well as bank products like CDs. Each option has different features, objectives, and levels of risk.
For example, some investment options may be riskier but also more likely to earn more. Others have lower growth and earning potential but carry less risk.
You’ll need to decide how much risk you’re comfortable with.
Take a quick risk tolerance quiz (PDF) to find out what type of investor you are.
How long until you plan to retire?
Depending on when you might retire, you may have more time to let your savings grow and recover from potential market downturns. If so, you might want to take on more risk with the potential for more growth.
However, as you near retirement age, you may not want to risk your savings dropping significantly if there’s a market downturn because there isn’t as much time to recover. Investing in less risky options may be better.
What's next?
Want a little help? A financial professional can walk you through your options and help you put together an IRA portfolio specific to your needs. Check with your HR contact to see if your company’s retirement savings plan offers financial professional services. Or, we can help you find one near you.
