Want to Open a Traditional IRA? Here’s a Step-by-Step Guide

A traditional individual retirement account (IRA) is one of the most common ways to save for retirement due to its tax advantages. These accounts are also commonly used because they are easy to open and maintain. 

The tax advantages of a traditional IRA are simple. Yearly contributions are tax-deductible, and your investments grow tax-deferred while in the IRA. Then, withdrawals during retirement are taxed according to your income tax rate during retirement.

If you’re looking to open a traditional IRA, this guide will walk you through what you need to know to open and manage your traditional IRA, from choosing the right provider to understanding the rules that govern contributions and withdrawals.

Key Takeaways

• Opening a traditional IRA is straightforward and can be done through online brokers, robo-advisors, or financial institutions.
• Contributions to a traditional IRA are tax-deductible, and your investments grow tax-deferred.
• Choose the right IRA provider based on fees, investment options, and customer service.
• Stay informed about contribution limits, required minimum distributions (RMDs), and potential early withdrawal penalties.

1. Understand What a Traditional IRA Is

Before you start the process of opening a traditional IRA, it’s important to understand what this type of account offers. A traditional IRA is a retirement account that allows you to make tax-deductible contributions, with investments growing tax-deferred until you start making withdrawals in retirement.

Keep in mind the IRS imposes rules and limits on the contributions you can make each year, otherwise a penalty may be applied.

2. Consider Your Investing Style

One benefit of traditional IRAs is that they can be invested in various investments, such as mutual funds, stocks, and bonds, similar to a brokerage account. Company-sponsored 401(k) plans often limit your investment options, and if these options do not agree with your investment priorities, you may be dissatisfied with your investment outcomes. 

On the other hand, with the wide variety of investment options available through a traditional IRA, you will have to decide how much time and energy you can and want to devote to managing your IRA. 

Opening a traditional IRA with a robo-advisor instead of a traditional broker is a great option for individuals who want to take a more passive approach to investing. Opening a traditional IRA at a brokerage with the help of a financial advisor could also be a compelling option for more hands-free investors. However, these services both charge fees, which can be unappealing to some people. 

“If you don’t have the time and energy, or if the idea of parsing through different investment options makes you anxious or nervous, I think it makes a ton of sense, at a minimum, to consider using a robo-advisor, because robo-advisors are usually way cheaper than the typical 1% in-person advisor fee,” said Taylor Jessee, CFP, CPA, founder of Impact Financial.  

Note

Mutual funds and ETFs are popular investment choices in long-term retirement accounts like traditional IRAs because of their low risk over extended investment periods. Therefore, independently investing in an IRA may seem more approachable than independently investing in a brokerage account. 

3. Choose an IRA Provider

Once you have decided whether to open your traditional IRA with a robo-advisor or a traditional broker, you will need to decide which provider to open your account with. 

Not all robo-advisor and traditional broker providers are created equal. These are some key considerations when comparing different products:

• Fees or commissions: Some brokers or robo-advisors impose fees or commissions on traditional IRAs. Research fee schedules and rates to find the right account for yourself. 
• Investment options: Traditional IRAs can generally be invested in stocks, bonds, mutual funds, and ETFs. However, if you are interested in alternative investments or real estate products, you should make sure that your account provider offers those options.
• Account or investment minimums: Some traditional IRA providers may have an account or investment minimums. Research this factor in advance to avoid any potential friction in your contribution schedule. 
• Customer support: Quality customer service can be key to an enjoyable and successful investment experience. 
• Educational resources: The availability and quality of investment education resources at your account provider can be a crucial factor when opening a traditional IRA, especially for inexperienced investors. 

4. Open a Traditional Account

Opening a traditional IRA is a straightforward process, often done entirely online. After selecting your provider, you’ll need to provide personal identification and financial information.

“Lots of mobile apps have it where you can open up an IRA or an investment account straight through your mobile phone,” Jessee said. “It’s not like how it was in the 70s, 80s, like before, the internet, where your only choice was to go to a stockbroker to open the account.”

Necessary materials vary by provider, but here are some common requirements: 

• Personal identification information (Social Security number and driver’s license or another form of personal identification) 
• Personal financial information (statement of assets or cash) 
• Employer information (if applicable)
• Beneficiary information

When you are actually opening the account, you will likely need to perform the following: 

• Create login credentials and answer security questions 
• Select account features
• Provide necessary information 
• Decide how to fund the account 

Nowadays, opening a traditional IRA account is a simple process. If you run into any roadblocks, customer service will likely be able to help you work through the issue. 

5. Fund Your IRA 

The final step to opening a traditional IRA is to fund the account. There are three main ways to fund a traditional IRA from an existing financial institution, and they are not unique from other kind of investment account: 

• Electronic funds transfer (EFT): It can be very convenient to transfer funds from an external account to your traditional IRA through an EFT. Creating this link between accounts can make it easier to fund your traditional IRA from that external account in the future. 
• Wire transfer: Wire transfers can also facilitate fund cash transfers from an existing financial account to your traditional IRA. These transfers are similar to EFTs but generally require more time than EFTs. 
• Check deposit: Checks from your existing financial institution can be mailed or deposited into your traditional IRA in person. 

Important

For 2024 and 2025, you can contribute up to $7,000 per year ($8,000 if you’re 50 or older). If your income is below the contribution limit, you may be able to contribute a lesser amount.

Important Considerations Before Opening a Traditional IRA

Before you open a traditional IRA, make sure that you understand the full terms of the account and how it compares to other retirement products. 

Choosing a Traditional IRA Over Other Retirement Accounts

A traditional IRA is just one mechanism to support retirement savings. When opening or considering opening a traditional IRA, you should consider other investment options to ensure that this is the right decision for you. 

You may want to explore other IRA options, like Roth IRAs, SIMPLE IRAs, and SEP IRAs, in order to determine if the tax advantages of the traditional IRA best suit your personal budget and career trajectory. For example, a SEP IRA is designed for self-employed individuals, and Roth IRAs have an annual income limit, while traditional IRAs do not. 

You may also want to contribute to a traditional IRA in addition to other retirement products. 

“The vast majority of employers these days offer a 401(k), so usually if you’re just starting out in your retirement savings journey, a 401(k) is almost always going to be the easiest and most efficient place to start,” Jessee said. “Once you check the box of putting money into your 401(k), then I think it can make sense to branch out and say, ‘I’m going to do a 401(k) and an IRA because I still have money that I want to save’.” 

Contribution Limits

Traditional IRAs, like Roth IRAs, have annual contribution limits. Therefore, you may want to consider investing sooner rather than later to maximize your return on investment during retirement. 

For 2024 and 2025, you can contribute up to $7,000 to your traditional IRA. To help older adults catch up on retirement savings, adults over age 50 can contribute up to $8,000 in 2024.

If your taxable compensation or total income for the year is less than $7,000, you can contribute up to the whole of this compensation. 

Early Withdrawal Penalties

Because traditional IRA investments are tax-advantaged and intended to remain in accounts until retirement, the IRS imposes early withdrawal penalties on these accounts. 

Withdrawals before the age of 59½ years old from a traditional IRA are subject to income tax in addition to a 10% penalty unless you have a specific extenuating circumstance. Exceptions to the 10% penalty include certain medical reasons, first home purchases, births, and adoptions. 

Similar restrictions apply to other kinds of retirement accounts, and considering this limitation may affect your retirement strategy. 

“Investments don’t have to just be retirement,” said Kevin Lao, CFP, founder of Imagine Financial. “It could also be investing into yourself, investing into education, investing into a skill or a trade because that’s going to add value to your earning potential, and more earning potential in your 30s, 40s, and 50s will pay more dividends than just saving 10% or 50% of your salary for the next 30 to 35 years.”

Warning

Be aware of early withdrawal penalties on traditional IRAs.

Required Minimum Distributions (RMDs)

Required minimum distributions are the amount of money that you must withdraw from your traditional IRA after you reach age 73 (age 72 if you reached that age before Dec. 31, 2022). 

Required minimum distributions for traditional IRAs vary depending on marital status, spouse age, and beneficiaries. For specific information, consult the IRS website. 

If You Are Rolling Over a 401(k)

If you are specifically rolling over a 401(k) from a former employer to a traditional IRA, you will likely want to roll over your retirement plan distribution. By rolling over, you generally will not have to pay tax on your investments until you withdraw from your new plan, and you will not incur any penalties if your distribution is given to you before age 73. 

“The traditional IRA is more for folks that are doing a rollover,” Lao said. “Let’s say [you] have a 401(k) plan from a previous employer, and [you]’ve built up a couple million dollars and want a little bit more control over [your] investments, but don’t want to go through the whole corporate bureaucracy of tapping into [your] 401 k plan… [You] can roll those funds into a traditional IRA and control the investments a little bit more.”

To complete a distribution rollover, you will need to deposit the distribution within 60 days of receiving it, and generally, you can only complete one rollover per year. To learn more about specific situations, consult the IRS website. 

Can I Open a Traditional IRA on My Own?

Yes. Traditional IRAs can be easily opened through many different brokers and robo-advisors by providing personal identification and financial information. To ensure that you are opening an account that fits your personal goals and investment style, you may want to compare different accounts’ fees or commissions, investment options, account or investment minimums, customer support, and educational resources. 

How Much Money Do You Need To Open a Traditional Ira?

The amount of money required to open a traditional IRA depends on the provider. Many brokers and financial institutions allow you to open an IRA with no minimum deposit, but some may require an initial contribution, often ranging from $100 to $1,000.

Can I Open a Traditional Ira at a Bank?

Yes, you can open a traditional IRA at many banks. However, bank IRAs typically offer fewer investment options (like certificates of deposit or savings accounts) compared to brokerage firms or robo-advisors, which offer a wider range of stocks, bonds, and mutual funds.

The Bottom Line

You can open a traditional IRA in a few simple steps. When opening a traditional IRA, evaluating your investment style, provider fees, and contribution limits in advance is crucial. This accessible retirement tool offers tax-deductible contributions and tax-deferred growth through diverse investment options.

To effectively manage your IRA after opening it, regularly review your investment strategy, take advantage of employer-sponsored plans, and stay informed about retirement savings options to maximize your long-term benefits.