The logistics of opening an IRA are pretty rote — choose an IRA account type (Roth or traditional), fill out paperwork, fund your account, invest.
It’s in the execution where things can get confusing: How much are you allowed to contribute to an IRA? Which type is best — Roth, traditional, rollover or something else? What investments should you buy? Which of the dozens of financial institutions that offer IRAs should you choose?
When it comes to choosing where to open an IRA, here’s the hand-to-heart truth from someone who has spent years reviewing providers with the meticulous intensity of a forensic examiner:
It’s hard to go wrong with any of the big-brand brokers: If they have a familiar name — you know, brokerage firms like Fidelity, Charles Schwab, Vanguard, TD Ameritrade, Merrill, E-Trade — you’re in good hands. Same with portfolio management services (aka robo-advisors) like Betterment, Wealthfront, Ellevest, etc.
Just make sure they have these basics: The must-haves for anywhere you’re considering opening an IRA are: 1) SIPC insurance (similar to FDIC insurance) to cover losses from theft or fraud or if a firm goes belly up (investment losses are not covered). 2) A well-stocked lineup of low-fee retirement investments (index mutual funds, target-date funds, ETFs, stocks, bond funds, etc.). 3) If desired, additional — and affordable — services (like portfolio management, financial planning tools, access to one-on-one advice).
If you’re not completely satisfied, it’s easy to switch: If you decide you don’t like the service or want to upgrade to a firm that offers more (or fewer) bells and whistles — then you can transfer the money in your IRA elsewhere. (The new company will be more than happy to hold your hand through the process.)
4 Steps to Setting up an IRA
The only thing you really need to open an IRA is some I.D. (your Social Security number, contact info) and either a check or bank routing information to fund the account. What about a minimum initial deposit? Don’t worry about that now: Most institutions have done away with that hurdle. (Of course, when you want to start investing within your IRA you’ll need to cough up some cash to get it off the ground.) When you’re ready for liftoff, here’s what to do:
1. Choose an IRA account type
One of the first questions you’ll be asked when you go to open your account is what type of IRA you want to open. The two main choices for opening a new IRA are a traditional IRA or a Roth IRA. IRS rules dictate which you’re eligible to save in and how much you’re allowed to contribute.
If you’re transferring money from an existing IRA at a different institution or moving money over from an old 401(k) or 403(b) or other workplace retirement plan, you’ll open a “rollover IRA.” With a rollover IRA there are no contribution limits — you can move the entire balance into the new IRA as long as you choose the same account type (e.g. a Roth into a Roth).
There are other IRA types to choose from based on your situation (e.g., SEP and SIMPLE IRAs for freelancers or sole proprietors and small business owners). Because these aren’t as common as Roth and traditional IRAs, check in advance to make sure they’re available at the provider you choose.
2. Fill out some forms
You’ll provide some basic information to set up an account: Your name, address, contact information, birthdate, Social Security number and the same information for beneficiaries you want to inherit the account when you permanently retire from the planet. You may also need to provide some information about your employer.
3. Fund the account
The maximum annual IRA contribution the IRS allows in 2019 and 2020 is $6,000 if you’re under age 50 and $7,000 if you’re age 50 or older. Don’t worry: You don’t have to cough up the entire amount at once. In fact, most brokerages set IRA account minimums at $0, so you can deposit money at any time. You have until the day your taxes are due (July 15 for the 2019 tax year) to set up and fund your Roth and/or traditional IRA for the previous year.
The easiest way to seed your IRA is with an electronic bank transfer — or wire transfer. All you need is your account and bank routing numbers to move money from your savings into your IRA. You can set up automatic transfers if you want to build your balance gradually.
If you’re doing an IRA rollover from a former employer’s 401(k) or other workplace plan into an IRA, the new institution will be happy to walk you through the process to make sure it goes smoothly and according to IRS rules. (You’ll do a direct transfer from the old account into the new one so the money stays under the tax-protective IRA seal the entire time.)
4. Pick your IRA investments
The money you deposit in an IRA isn’t immediately invested. (Remember, an IRA is merely the account that holds the investments you choose.) Unless you say otherwise, it will sit in cash or a cash-equivalent such as a money market fund. You definitely want to get your money working harder for you ASAP. After all, one of the biggest advantages of an IRA is that it provides access to investments with higher growth potential.
Investing within your IRA can be as easy as picking a target-date mutual fund (aka a lifecycle fund) in which your money is invested across the array of assets based on your age. The investment mix becomes more conservative (aka less volatile) as you get closer to your retirement date.
An inexpensive option if you’re not the DIY investing type is to use an automated portfolio management service — aka a robo-advisor. These services use a sophisticated algorithm to pick the appropriate mix of investments in your IRA based on when you need the money and how much risk you’re willing to take on. Most of the major brokerages, as well as a handful of established robo-only firms, offer low-priced automated IRA management services.
The most important thing about opening an IRA is this
Just get started. Women especially have no time to waste worrying over whether or not they’re doing it right. Like we said earlier, it’s easy to undo if you’re not happy with the institution you chose for your IRA.
More on IRAs from HerMoney:
- 6 Types of IRAs Every Woman Needs To Know About
- IRA vs. 401(k): What’s the difference?
- You Just Left Your Full-Time Job: What To Do With Your 401(k)
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