Getting started with individual retirement accounts (IRAs) can seem complicated, but it takes just a few simple steps. Years from now, you’ll thank yourself for taking the time to make the right investment decisions.

KEY TAKEAWAYS

  • You can set up an IRA at almost any bank, brokerage, or other financial institution.
  • When picking a place for your account, consider the fees and costs attached to the IRA.
  • Traditional IRAs and Roth IRAs are the two major types of IRAs available to individual investors.
  • There is a limit to how much you can contribute to a traditional or Roth IRA annually.

Where to Open an IRA

You can set up an IRA at almost any bank, brokerage, or other financial institution. All it takes is your signature on the paperwork and a check for your first contribution.

You can also take care of most of the details online. In fact, online brokerages have eclipsed traditional brokerages to become the primary way people sign up for new accounts. The best brokers for IRAs and Roth IRAs have user-friendly interfaces and valuable educational materials, which makes opening and maintaining an account easier than ever.

Considerations When Choosing an IRA Provider

When picking a place for your account, consider the fees and costs attached to the IRA. As with any investment, there are trading fees, and they can vary widely. You should be wary of gratuitous charges, like "maintenance" fees or "custodial" fees. On the other hand, some companies offer special deals for new accounts. Check whether a custodian you’re considering is offering an incentive for you.

In addition, consider the options they offer for your investment. Your IRA money can be invested in exchange-traded funds (ETFs), mutual funds, bonds, individual stocks, and other assets. You can choose risky “growth” funds or slow-growing but stable money market funds. Best of all, you can spread your money around, mixing conservative and aggressive investments. You'll get the usual quarterly statements, though you can check the progress of your funds online anytime.

Investments that are more stable in the short term generally have lower long-run returns.

You can change your mind about how your money is invested at any point, and you probably should periodically. Investment advisers urge people to take some risks when they’re young and get more cautious as they get closer to retirement.

Traditional IRA or Roth IRA?

Traditional IRAs and Roth IRAs are the two major types of IRAs available to individual investors. Small businesses and self-employed people can also open SIMPLE IRAs and SEP IRAs. The main difference between traditional and Roth IRAs lies in the tax treatment of your contribution.

Your contribution to a traditional IRA is in pretax dollars. It reduces your taxable income for the year. After retirement, you usually owe taxes on all the money that you withdraw, both the original dollars paid in and the investment income it earned.

In contrast, a Roth IRA requires payment in after-tax dollars. You pay taxes on the income before you make a deposit and get no immediate tax benefit. After you retire, your entire nest egg is tax-free, including the investment income.

IRA Contribution Limits

There is a limit to how much you can contribute to a traditional or Roth IRA annually. For the tax year 2020, the limit is $6,000 for people under age 50, and $7,000 for those 50 and over. However, you cannot contribute more than 100% of employment income. Additional information on contribution limits is available from the IRS.

Even if one spouse is not employed or has very little income, married couples can invest more. A measure called the Kay Bailey Hutchison Spousal IRA Limit allows a married couple to jointly contribute $12,000 for 2020. The limit is $13,000 if one spouse is at least age 50, and $14,000 if both are 50 or older.

The Bottom Line

Right about now, you may be feeling that you don't have enough time to do this properly. It is easier than you think. Most banks and brokerages offer IRAs, so you can probably open an IRA at a financial institution where you already have an account. Just be sure that the fees are reasonable. Roth IRAs and traditional IRAs are both excellent choices, but you must stay within the contribution limits.

Remember, you can change your investment decisions or even switch providers altogether if you find a better deal. Best of all, you can set up automated payments to add to your new IRA regularly. That way, you can grow your investments every year and reap long-term financial benefits in the future.