The “How to open an IRA” question has an easy answer. In this post we show the three steps to open an IRA. We also give a list of 10 providers, plus fees to compare. There are some pitfalls so make sure to compare fees and commissions.
Knowing how to open an IRA means picking a provider like Scottrade or Schwab. Just visit the provider’s website and let it walk you through the steps. Once a provider is chosen, the process is easy. Just fill out the application and make the first deposit. An IRA is a great way to lower your tax bill. It’s also an excellent way to save money in the future. A big reason a lot of people still don’t use this simple, powerful tool is that they just don’t know how to open an IRA. As this article shows, it’s not rocket science.
How to Open an IRA
How to Open an IRA
|How to open an IRA step 1: Pick a Provider|
|How to open an IRA step 2: Apply|
|How to open an IRA step 3: Make Your First Deposit|
The steps to open an IRA are very simple. Just pick a provider, fill out their application and make a deposit. It’s as easy as opening a bank account. The one stumbling block is the fees. Different providers have very different fee schedules. Make sure the IRA provider you pick offers low fees and commissions.
The table below gives a good cross section of what IRA providers are out there. Any of them can show you how to open an IRA. They all have online applications. They also have very different fees.
Also see: What is an IRA? Our Complete IRA Guide
How to Open an IRA Step 1: Pick a Provider
|How to Open an IRA: Pick a Provider|
|IRA Provider||How to Open an IRA There||Fees||Commissions Per Trade||Account Minimum|
|Scotttrade||Visit Scottrade's "How to Open an IRA" page.||$0||$7 and up||$0|
|Betterment||Visit Betterment.com. There's no specific "How to open an IRA" page, but click the "Get Started" button and go from there.||.15% to .35% per year||$0||$0|
|E*Trade||Visit E*Trade's "How to open an IRA" page. The page will walk you through the steps.||$0||$7.99 to $19.99||$0|
|TD Ameritrade||Go to Ameritrade's "How to Open an IRA" page. Let the page walk you through opening an IRA.||$0 maint fees||$9.99 per internet trade.||$0|
|Fidelity||Go to Fidelity's and click the "open an account" button.||$0 annual/maint fee||$7.95 to $13.70||$0|
|Merrill||Visit Merrill's How to open an IRA page and click the "open an account" button.||$0 annual/maint fee||$6.95||$0|
|Vanguard||Visit Vanguard's how to open an IRA page and click the "Open Your IRA Today" button.||.3% per year||$0||$1,000 to $3,000|
|Wells Fargo||Go to Fargo's how to open an IRA page and click the "Get Started" button.||$0 annual fee. Termination fee $95.||$6.95 to $8.95||$0 to $100|
|Schwab||Visit Schwab's how to open an IRApage and pick an IRA type to get started.||$0 annual/maint fee||$0 to $8.95||$1,000|
|Wealthfront||Wealthfront doesn't have a specific "How to Open an IRA" page, but go to their start investing page and follow the easy steps.||.25% annual||$0||$500|
|CapitalOne||Go to CapitalOne's how to open an IRA page and follow the simple steps.||$0 account fees||$29.95||$0|
The providers in the table above can all answer the question of how to open an IRA. In fact, opening an IRA is as simple as visiting one of their websites. There are many other IRA providers, but the list above presents some good choices. They all have different pros and cons, and most of those are fees.
The trading commissions don’t matter much to most people looking to start an IRA. Most of the IRA providers above charge $7 to $30 for a single trade. Most IRA account holders aren’t looking to trade stocks often. They’re just looking for a place to put their money where it’s safe from taxes and it can grow untouched. Generally, when someone opens an IRA, they don’t trade the money often.
Fees are a different animal. Some IRA providers charge an annual fee. Some call that fee a “maintenance” fee. Still other providers charge a high fee for closing an IRA account. Before you open an IRA with any of the providers listed above, make sure to read the fine print on their fees list. Saving money is great, but getting your savings eaten up by fees defeats the purpose.
How to Open an IRA Step 2: Apply
The second step in the “How to open an IRA” process is to apply. Once you’ve picked a provider, visit their website and use their online application. Most of these online applications are pretty simple and ask for the same information used to open a bank account.
For example, E*Trade’s online IRA application asks for a name, email address, phone number and social security number. It also asks for employer info, income and net worth. People who aren’t comfortable giving out sensitive information online can call the provider and set up the account over the phone. However, sharing this info over the phone may be even less secure than doing it online. To find out why, see our article on tax fraud. To protect yourself, see our article on why you should get an IRS IP PIN.
How to Open an IRA Step 3: Make Your First Deposit
The final step in the “How to open an IRA” chain is to make the first deposit. Most of the IRA providers in this article don’t require a minimum balance. However, the point of opening an IRA in the first place is to save money. To do that, account holders obviously need to put some money into the IRA account.
Generally speaking, it’s a good idea to put as much money into the IRA account as possible. IRA contribution limits for 2015 and 2016 are $5,500 per year for most people. Those age 50 and over can deposit $6,500 per year.
The reason it’s a good idea to max out an IRA every year is tax savings. The more money goes into a traditional IRA, the lower the tax bill in that year. It’s not necessary to max out the account the same day it’s opened. That said, the bigger the deposit the better.
Also see: Traditional IRA vs Roth IRA
How to Open an IRA: Next Steps
The money in an IRA does not have to be invested. However, a big part of the reason to open an IRA is growth. Money in an IRA can be left as a simple bank account. It can grow a fraction of a percent per year in most savings accounts. It can also be put into a CD, money market account or be invested in stocks and bonds. You don’t need to know how to invest to know how to open an IRA. Still, investing is usually a good idea.
To find out how to invest the money in your IRA, talk to your provider. Once the account is opened, call the provider’s customer service line. The representatives there will ask questions to determine what kinds of investments are right for you. Generally, younger people can stand more risk since they’ll have time to make the money back after a crash. Older people will want to play it a lot safer because they don’t have time to recover. Also, anyone who needs the money over the next couple of years shouldn’t invest with very much risk. That includes someone who needs the money to buy a house or to pay for college.
What is an IRA?
Beyond knowing how to open an IRA, it’s a good idea to know what one is. An IRA is an Individual Retirement Account. It’s just basically a bank account with a special tax status. The money put into an IRA gets some immunity from taxes.
There are two main kinds of IRAs. Each one protects money from taxes in a slightly different way.
A traditional IRA gives a tax break on money earned in the year it’s deposited. As an example, imagine someone who earns $50,000 a year. When they do their taxes in the spring, they have to declare income of $50,000. But if that person puts $5,500 in an IRA, now they only have to pay taxes on $44,500 of that income. That could give them a significantly lower tax bill.
A Roth IRA is different. It gives a tax break on money later in life. There’s no tax break during the year the deposit is made. The Roth IRA tax break comes later, after the money has grown through investing. Someone who saves $5,500 a year for 40 years might have $900,000 by the time they retire. If the money is in a Roth IRA, it’s not taxed in retirement.
Why Open an IRA?
People who ask how to open an IRA usually know it’s a good idea, but they might not know why. Money that’s saved in an IRA has some protection from taxes. Money that’s saved outside an IRA doesn’t. Someone who saves $5,000 a year in a regular savings account and pays 28% in taxes on it will pay $56,000 in 40 years. Someone who saves that money in a traditional IRA will pay $0 in that 40 years. If the money gets invested and adds $700,000 in interest, that money will be taxed when it’s withdrawn. Still, the tax savings from an IRA is impressive.