How to Open an IRA in 5 Steps

One smart way to save for retirement is to open an IRA. To effectively invest in IRA, you need information on how to open an IRA. This post outlines details on how to open an IRA and other details like eligibility.

What is an Individual Retirement Account IRA?

An IRA which means an Individual Retirement Account is a retirement savings account. This type of savings account comes with a tax advantage to encourage people to save for retirement. The good thing about IRA is that anybody can open the account, unlike the 401k that can only be sponsored by an employer. The contributions accumulated in an IRA is invested in different investment vehicles. You cannot withdraw your contributions in an IRA until you get to 59.5 years. Any withdrawal from your contribution before this time will incur a penalty. The penalty is 10% of the amount contributed to the account and tax.

Also read: How to Start a 401k As An Employee

Investment Options Available For an Individual Retirement Account IRA

It was mentioned earlier that the amount contributed in an IRA is placed in different investment options. The investment option available depends on the IRA Company or provider. But on a general note, these are some of the investment options available for an IRA account:

a. Stocks: When you invest in stock, you buy into the shares of a company. Stock investment is a high-risk investment option because the value of a company’s stock can decrease instantly. The good thing about stock investment is that it has a high return.

b. Bonds: One of the ways most corporations and government raise money to carry out big projects is to issue bonds to the public. Investing in bonds makes the bond issuer indebted to the bondholder. Bonds are generally a low-risk investment option because the risk of default is on the low side. The disadvantage is that the returns from investing in bonds are usually low.

c. Certificate of Deposits: Certificate of deposits is a savings account in which you are required to maintain a minimum balance for a stipulated time. It is another low-risk investment option in an IRA. The maturity period of Certificates of Deposits depends on the terms. Most times, the maturity period of a Certificate of Deposit can last for a couple of months to a couple of years. The return on CDs is also on the low side.

d. Mutual Funds: For mutual funds, different investors contribute money which is invested in various securities. It is one of the investment options you can pick for your IRA account.

e. Exchange Traded Funds: ETFs are similar to stocks in that they are traded in the stock exchange. An ETF holds assets like bonds and commodities.

How to Open an Individual Retirement Account IRA:

Step 1: Have an Investment Plan

Just like you need a business plan to start a business, you need an investment plan for your investment. Most people make the mistake of making investments without an investment plan. What is an investment plan? An investment plan is a document that contains details of how you intend to build your investment portfolio. It includes details like investment options, amounts to invest in each investment option. Your contribution to an IRA account will be invested in different investment options, so there is a need to have an investment plan. This post outline contains details you should include in your investment plan.

Step 2: Choose an IRA Provider:

The next is to choose an IRA provider. There are tens of IRA companies you can start.  Always bear in mind that not every company that fronts as an IRA company is credible. You have to carry out extra research on the credibility of an IRA company before you open an account. Some factors to consider when choosing an IRA provider are the commission, fees on the account, minimum account, and customer support. Also, you have to read reviews from clients using any IRA company to ensure they meet your needs before you pitch your tent.

Step 3: Open an Account:

After you’ve chosen an IRA provider, you have to open an account with the company. The process of opening an account is quite straightforward. Visit the IRA Company’s website and click the option to create an account. Click on the type of IRA you wish to open, enter your details and create an account. On the option for the type of IRA account, there are usually two options, the Traditional IRA and the Roth IRA. Both are similar just that you get no tax deduction on your contributions in a Roth IRA while tax deductions are made on the Traditional IRA.

Step 4: Fund the Account:

You have to fund your IRA account for the account to become active.

How to Fund an IRA Account

There are different options available to fund your IRA account. You can either make a direct transfer from your bank account to your IRA account. You can also roll over a 401k into an IRA. Finally, you can transfer an existing IRA into the new account.

Also read: Smart Things You Need To Do To Retire Early

Step 5: Choose Investment Options:

Various investment options available for an Individual Retirement Account have been mentioned earlier. After you fund account, go ahead and pick investment options.  You can manage the account personally. Some IRA companies provide an opportunity for an auto-managed account. If you intend to manage your IRA account, you have to divide your investment options into high-risk and low-risk investments and know the amount to invest in each.

This in summary is the process of opening an IRA in a nutshell.