How to open an IRA and start putting money in it
An Individual Retirement Account (IRA) is a savings account the federal government lets you use for retirement, with tax advantages that a regular savings account does not have. You open one through a bank, brokerage firm, or credit union — not through the government. The institution holds the account and invests the money you deposit according to your choices. You decide how much to put in each year (up to a legal limit), what to invest it in, and when to withdraw it after age 59½.
The two main types are Traditional IRA and Roth IRA. With a Traditional IRA, you may deduct what you contribute from your taxes in the year you contribute it, but you pay income tax on the money when you withdraw it in retirement. With a Roth IRA, you contribute money that has already been taxed, but the withdrawals in retirement are tax-free. Which one makes sense depends on your current income, your expected income in retirement, and your tax situation — a tax professional can help you decide.
Key Takeaways
- You open an IRA at a bank, brokerage, or credit union by filling out an account application and choosing Traditional or Roth.
- For 2024, you can contribute up to $7,000 per year to an IRA if you are under 50, or $8,000 if you are 50 or older.
- You can only contribute money you actually earned that year — you cannot contribute more than your total income for the year.
- Once the account is open, you transfer money into it and then choose how to invest it (stocks, bonds, mutual funds, or keep it in cash).
- You cannot withdraw money before age 59½ without paying a 10 percent penalty, with limited exceptions for hardship.
Who can open an IRA
You must have earned income in the year you want to contribute. Earned income means wages from a job, self-employment income, or other money you were paid for work — not investment returns, rental income, or Social Security. If you had no earned income that year, you cannot contribute to an IRA that year, even if you have savings.
If you are married and your spouse has earned income but you do not, you may be able to open a Spousal IRA and contribute based on your spouse's income. The rules vary by state and by whether you file taxes jointly, so check with the financial institution or a tax professional.
There is no upper age limit to open an IRA or contribute to one, as long as you have earned income that year. You can open one at any age.
Contribution limits and how much you can put in
The federal government sets a yearly limit on how much you can contribute to an IRA. For 2024, the limit is $7,000 per year if you are under age 50, and $8,000 per year if you are 50 or older (the extra $1,000 is called a "catch-up contribution"). These limits change each year, usually by small amounts.
You cannot contribute more than your total earned income for that year. If you earned $4,000 in 2024, you can contribute at most $4,000 to an IRA for 2024, even though the legal limit is higher. If you are married and file taxes jointly, you and your spouse each have your own limit based on your own income.
You can contribute at any time during the year, or you can wait until the tax filing deadline the following year (usually April 15). If you contribute after the year ends but before the deadline, it counts toward the previous year's limit.
Steps to open an IRA account
First, decide where to open it. Banks, credit unions, and brokerage firms all offer IRAs. Banks and credit unions typically offer simpler options (savings accounts, CDs, money market accounts). Brokerages offer more investment choices (individual stocks, bonds, mutual funds, exchange-traded funds). Choose based on how much control you want over your investments and how much time you want to spend managing them.
Second, go to the institution's website or visit in person and find the IRA application. You will need to provide your name, Social Security number, address, and date of birth. You will choose whether you want a Traditional or Roth IRA. Some institutions ask you to choose your investments at this stage; others let you do it after the account opens.
Third, fund the account. You can transfer money from a bank account, mail a check, or in some cases set up automatic monthly transfers. The money goes into the IRA, not directly into investments — you then decide what to do with it.
Fourth, choose your investments (if you have not already). If you opened the account at a bank, your options might be a savings account, a CD, or a money market account. If you opened it at a brokerage, you can choose individual stocks, bonds, mutual funds, or target-date funds (funds that automatically shift from stocks to bonds as you get closer to retirement). You can change your investments later.
What happens after you open the account
Once money is in the account, it grows tax-free (in a Traditional IRA) or tax-free on withdrawals (in a Roth IRA). You can move money between investments within the same IRA without paying tax or penalty. You can also transfer the entire IRA to a different institution if you want to switch banks or brokerages — this is called a rollover and does not count as a withdrawal.
You must keep track of your contributions for tax purposes. If you contributed to a Traditional IRA, you report the deduction on your tax return that year. If you contributed to a Roth IRA, you do not deduct it, but you need records to prove you contributed after-tax money (so withdrawals are not taxed twice).
If you have a Traditional IRA, you must start taking withdrawals at age 73 (as of 2023; this age changes by law). These are called Required Minimum Distributions (RMDs). If you do not take them, you pay a penalty. Roth IRAs do not require withdrawals during your lifetime.
Withdrawing money before retirement
You can withdraw money from an IRA before age 59½, but you will pay a 10 percent penalty on the amount withdrawn, plus income tax on it (in a Traditional IRA) or lose the tax-free growth (in a Roth IRA). There are a few exceptions: you can withdraw without penalty for a first home purchase (up to $10,000 lifetime), higher education expenses, medical expenses over 7.5 percent of your income, health insurance premiums if you are unemployed, or a permanent disability.
Roth IRAs have a special rule: you can withdraw the money you contributed (not the earnings) at any time without penalty or tax, because you already paid tax on it. You can only withdraw the earnings penalty-free if you meet the age and holding-period requirements.
Traditional IRA vs. Roth IRA: the main differences
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Tax deduction when you contribute | Yes (may be limited if you have a workplace retirement plan) | No |
| Tax on withdrawals in retirement | Yes, on all withdrawals | No, if you follow the rules |
| Required withdrawals at age 73 | Yes | No |
| Can withdraw contributions early without penalty | No | Yes |
| Income limits to contribute | No income limit, but deduction phases out if you have a workplace plan | Yes, contribution phases out at higher incomes |
Frequently Asked Questions
Can I have both a Traditional IRA and a Roth IRA?
Yes, but your total contributions to both accounts combined cannot exceed the yearly limit. If you contribute $4,000 to a Traditional IRA, you can contribute only $3,000 to a Roth IRA that year (assuming the limit is $7,000). You file one tax return and report all IRA contributions together.
What if I already have a 401(k) at work — can I still open an IRA?
Yes. You can have both. However, if you have a workplace retirement plan, the tax deduction for a Traditional IRA contribution may be limited depending on your income. A Roth IRA has no such limit, though Roth contributions are limited at higher incomes. A tax professional can tell you which makes sense for your situation.
Can I move money from a 401(k) into an IRA?
Yes, this is called a rollover. When you leave a job or retire, you can roll over your 401(k) balance into a Traditional IRA at a bank or brokerage. You must do this within 60 days or through a direct transfer (where the 401(k) administrator sends the money straight to the IRA) to avoid taxes and penalties. The rules differ for Roth conversions, so check with a tax professional.
What if I contribute too much to my IRA?
If you contribute more than the legal limit or more than your earned income, you have an excess contribution. You must withdraw the excess and any earnings on it by the tax filing deadline, or you pay a 6 percent penalty each year the excess sits in the account. Contact the institution where you opened the IRA to correct it.
Do I need to report my IRA on my taxes?
If you contributed to a Traditional IRA and deducted it, you report the deduction on your tax return. If you contributed to a Roth IRA, you do not report the contribution itself, but you should keep records. When you withdraw money, you report it on your tax return. A tax professional or tax software can walk you through what to report.