How to Set Up an IRA (Traditional or Roth) — A Step-by-Step Guide
Looking to start saving for retirement, but not sure where to begin? Individual Retirement Accounts (IRAs) are one of the most accessible and flexible tools available. Whether you’re eyeing a Traditional IRA for its upfront tax perks or a Roth IRA for tax-free growth, this guide will walk you through everything you need to know to open, fund, and manage an IRA confidently.
Already comparing Traditional vs. Roth? We’ll have a dedicated blog post on that.
🏦 Step 1: Understand Where You Can Open an IRA
You can open an IRA at several types of institutions, each offering different tools and experiences:
Brokerages (e.g., Fidelity, Vanguard, Schwab): These firms let you buy and manage your own investments like stocks, ETFs, and mutual funds.
Robo-advisors (e.g., Betterment, Wealthfront): These are automated platforms that build and manage a portfolio for you based on your risk tolerance and goals.
Banks or Credit Unions: These often offer IRA CDs or savings-style IRAs, but typically have lower growth potential.
Tip: Look for institutions that are FDIC- or SIPC-insured, charge low fees, and have strong customer support. Many websites will include this information in the “About” or “FAQs” section.
✅ Step 2: What You Need to Open an IRA
Opening an IRA is straightforward and typically takes under 15 minutes online. You'll need:
Social Security number
Date of birth and contact info
Employment and income details
Bank account information for funding
Once you’ve signed up, you can choose whether to fund your IRA immediately or wait.
🔁 Step 3: Make Your First Contribution
For 2025, you can contribute up to $7,000 if you're under 50, or $8,000 if you're 50 or older (IRS source). These limits apply across both Roth and Traditional IRAs combined.
You can check how much you’re eligible to contribute by reviewing IRS Publication 590-A or using your brokerage’s IRA contribution calculator.
Setting up automatic transfers isn’t required, but it’s a helpful way to stay consistent, especially if you tend to forget to contribute manually.
Tip: When you first contribute, it generally goes to the account’s cash balance. You need to actually choose and make the investments from there
🧠 Step 4: Choosing Your Investments (Basic Considerations)
Once your account is open and funded, you'll need to pick what to invest in. IRAs are just containers — the growth depends on what’s inside.
You’ll typically see options like:
Mutual Funds: Diversified and often actively managed
ETFs: Lower-cost, passive investment vehicles
Stocks or Bonds: For DIY investors
Many platforms offer a default portfolio or target-date fund.
A default portfolio is a preselected mix of investments based on your risk profile.
A target-date fund automatically adjusts your investment mix as you near retirement age.
If you're unsure, a robo-advisor or target-date fund can help you get started without overthinking. Some self-research doesn’t hurt as well.
⚠️ What Happens if You Over-Contribute?
Over-contributing to your IRA can trigger a 6% penalty tax each year the excess remains in the account.
To fix it:
Contact your provider and request a "return of excess contribution" before the tax filing deadline (plus extensions).
You’ll also need to withdraw any earnings made on that excess.
If you contributed to both a Roth and Traditional IRA and exceeded the total limit, this penalty could apply to either or both accounts depending on how the overage occurred.
🔍 When Can You Withdraw?
Traditional IRA
Normal distributions: After age 59½
Early distributions: Subject to 10% penalty plus regular income tax on the full amount
Roth IRA
Normal distributions: Contributions can always be withdrawn tax-free. Earnings are tax- and penalty-free after age 59½ and if you’ve held the account for at least 5 years.
Early withdrawals of earnings: Subject to 10% penalty unless you qualify for an exception (see IRS Publication 590-B, or my other blog here)
The penalty is applied to the amount withdrawn, not your total account value.
💡 Why Starting Early Matters
The biggest benefit to opening and contributing to an IRA early isn’t just about discipline — it’s about compound growth.
Even small contributions in your 20s or 30s can snowball into six figures by retirement thanks to market gains and reinvested earnings.
For example, contributing $3,000/year from age 25 to 35 (just 10 years) could grow to over $200,000 by age 65 assuming a 7% annual return — and that’s without adding anything after age 35!
✅ Final Tips
Check the contribution deadline each year (usually April 15 of the following year)
Track your contributions to avoid going over the limit
If you’re unsure how to allocate funds, don’t guess — consult with a professional or do your research
📲 Ready to Open an IRA or Have Questions?
At Akouson Financial, I help individuals navigate confusing tax and financial decisions with clarity. If you're ready to take the next step or want help choosing the right IRA path, schedule a 1:1 Strategy Session.
Disclaimer:
The information provided in this blog is for general educational purposes only and should not be construed as tax, legal, or financial advice. Every individual’s situation is unique, and you should consult a qualified tax professional or financial advisor before making decisions based on this content. Akouson Financial and its representatives are not responsible for any actions taken based on the information provided herein.