How Can I Open My Own Individual Retirement Account?

An Individual Retirement Arrangement, commonly known as an IRA, is a savings tool that offers tax advantages to individuals saving for retirement. Unlike employer-sponsored plans such as a 401(k), an IRA is an account that a person can open and manage on their own, providing a way to personally direct retirement savings. The core function of an IRA is to allow funds to grow with either tax-deferred or tax-free potential, depending on the specific type of account chosen.

Determining Your Eligibility to Contribute

The primary requirement for contributing to an IRA is having taxable compensation, which is income earned from working. Qualifying compensation includes wages, salaries, tips, commissions, self-employment income, and taxable alimony. Your total contribution to all your IRAs cannot exceed your taxable compensation for the year.

For married couples filing a joint tax return, a spousal IRA rule allows a spouse with little or no earned income to contribute to their own IRA. This is possible as long as the other spouse has sufficient taxable compensation to cover both contributions. The couple’s total contributions cannot exceed their joint taxable income or the combined annual limit for two IRAs. Recent changes to the law have also removed the age limit for making contributions to a Traditional IRA.

Choosing the Right Type of IRA

The two most prevalent types of IRAs are the Traditional IRA and the Roth IRA, which differ mainly in their tax treatment. Contributions to a Traditional IRA may be tax-deductible, which can lower your current taxable income, and withdrawals during retirement are then taxed as ordinary income. Contributions to a Roth IRA are made with after-tax dollars and are not deductible, but qualified withdrawals in retirement are tax-free.

For both 2024 and 2025, the maximum annual contribution to all of your IRAs combined is $7,000, or $8,000 if you are age 50 or older. The ability to contribute directly to a Roth IRA or deduct Traditional IRA contributions can be limited by your Modified Adjusted Gross Income (MAGI).

For 2025, eligibility to contribute to a Roth IRA phases out for single filers with a MAGI between $150,000 and $165,000, and for joint filers with a MAGI between $236,000 and $246,000. For Traditional IRAs, if you are covered by a retirement plan at work, the tax deduction for your contribution phases out for single filers with a 2025 MAGI between $79,000 and $89,000. For married couples filing jointly where the contributing spouse has a workplace plan, that phase-out range is between $126,000 and $146,000.

Information and Decisions Needed to Open an Account

To open an IRA, you will need your Social Security number, date of birth, and current mailing address. You should also be prepared with your bank account information, such as the routing and account numbers, to set up the initial funding of the account.

You must also designate a beneficiary, which is the person, trust, or organization who will inherit the account upon your death. You will need to provide the beneficiary’s full legal name, date of birth, and Social Security number.

You must also choose a financial institution to hold your IRA. The main types of providers are brokerage firms, robo-advisors, and banks. Brokerage firms offer the widest range of investment choices, including stocks, bonds, and mutual funds, while robo-advisors provide automated investment management. Banks may offer IRAs, but their investment options are often limited to certificates of deposit (CDs) or savings accounts.

When selecting a provider, consider factors such as:

• Annual maintenance fees
• Trading commissions
• The variety of investment options
• The quality of customer support

The Account Opening and Funding Process

Most financial institutions offer an online application that can be completed in a short amount of time. During the process, you will enter your personal details and beneficiary information and agree to the account terms and conditions.

After submitting the application, the next step is to fund the account. A common method is an electronic funds transfer (EFT) from a linked checking or savings account, which can be set up for a one-time contribution or recurring transfers. Another option is to mail a physical check to the financial institution.

Once your account is active and funded, you will receive your account number and instructions for online access. You can then log in to manage your contributions and select your investments.