Opening an IRA: 3 steps to get started
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 how to start an IRA. There are a few steps to take and some decisions to make, but don’t worry. We’ll walk you through it.
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. 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.1
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?
A traditional IRA may be right for you if you’ll likely be in a lower tax bracket in retirement (for example, because you won’t be getting a paycheck anymore). 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. Check this chart for details.
Will you want to withdraw money right away in retirement?
Starting in 2020, the age for required minimum distributions (RMDs) increased from 70½ to 72. However, if you turned 70½ before December 31, 2019 you must take the RMD for 2019, and again in 2020 even if you're not yet 72. Read more about other recent updates that may impact your retirement savings.
2. Research and select an IRA provider
There are many providers that offer IRAs. 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 thinking through 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 gives you access to a lot different of 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 also carry less risk.
You’ll need to decide how much risk you’re comfortable taking with your investments. Take a quick risk assessment quiz (PDF) to find out what type of investor you are.
A financial professional may also offer recommendations to help you work toward your specific goals.
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.
Get help from a financial professional
Sometimes it's nice to get a little help with your investing decisions, even when you've done your research. A financial professional can walk you through your options and help you put together an IRA portfolio specific to your needs.
- Talk to a tax professional and consider when a tax break would benefit you the most.
- Take our risk assessment (PDF)
- Get help from a financial professional. (Don't have one? Give us a call at 800-247-8000, ext. 2251.) You can also learn about robo-advisors and see if they might be a good fit for you.
- See what a Principal IRA has to offer.
1 Your account must be open for 5 years and you must be over age 59½ (or meet certain other exceptions) to be eligible for qualified tax-free withdrawals.
Investing involves risk, including possible loss of principal.
This document is intended to be educational in nature and is not intended to be taken as a recommendation.
Investing involves risk, including loss of principal.
The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, account or tax advice. You should consult with appropriate counsel or other advisors on all matter pertaining to legal, tax or accounting obligations and requirements.
Financial professionals are sales representatives for the members of Principal Financial Group®. They do not represent, offer, or compare products and services of other financial services organizations.