What’s an IRA and How to Open One

Blue Piggy Bank

My first investment was through an IRA, which stands for Individual Retirement Account, over 15 years ago. I started with that because it was easy to use as a novice investor. I didn’t know much about the ins and outs of IRAs, so once I understood more, I was able to switch companies and make my money work harder for me.

What is an IRA?

An IRA is an individual retirement plan, meaning you can do it on your own, that provides tax advantages for retirement savings. 

I like to stress the words tax advantages because it allows you to invest for many years in a tax-sheltered environment. 

If you open a regular taxable account and earn dividends, you have to pay taxes on those dividends during the year you received them. But if you get dividends within your IRA, you do not have to pay taxes on them at the end of the year. And depending on the type of IRA you have, you may never have to pay taxes on them.

There is a maximum to how much you can put in your IRA account, and the max for 2020 is $6000. If you are over 50 and need to catch up on your contributions, you can add  $1000. You can start withdrawing your money without penalty at 59 years old.

Why Do You Need an IRA?

I firmly believe that everyone that can have an IRA should have an IRA as preparation for retirement.  (If you have an adjusted gross income of more than $124K, you cannot fund one). You may not have a job that offers a 401k/403B plan, or if they do, they might not have a matching plan, or the company they use might have high fees. 

So an IRA really lets you take your retirement savings into your own hands. You have your choice of companies, the fees you pay, and how the investment is ultimately managed.

So How Do You Open an IRA?

It is easy to sign up for an IRA. Just about every single new investment start-up app has an IRA component. Which one you choose will depend on your comfort level with investing. 

For example, Betterment has an IRA component. They will take you through a series of questions to understand your risk tolerance and your ultimate goals, then structure the investments for you. 

M1 Finance will allow you to select plans based on your target retirement date and your risk tolerance or fund it however you choose. 

Smaller apps like Acorn and Stash have a similar process.

Or if you want to go a more traditional route, you can choose a company like Vanguard or Fidelity where your options are endless, and you’ll have access to great customer service people that can help you through the process.

All you need to open an IRA is your social security number and banking/personal identifying information and money to start. 

Many investment apps allow you to start with as little $5 to $100. With a traditional company, depending on your first investment, you may need as much as $1000 to $3000 to start. 

How Exactly Do You Fund an IRA?

Now that you have your IRA open, you have to fund it and select your investments. As I mentioned earlier, you can fund it up to $6000 for the calendar year. One thing to note, if you’re reading this before April 15th (or the current tax filing deadline) and didn’t fund an IRA the prior year, you can fund it for last year AND this year. You will have to select the funding year when making deposits.

If you use an app like Betterment, during the setup process, they will ensure that your investment selections are set up before calling the process complete. But let’s say you go the traditional route like Vanguard or Fidelity, or even M1 Finance. You have to make selections of the investments that you want. Just putting money in the account is not enough.

You have the flexibility of buying stocks, bonds, ETFs or mutual funds within your account. So you have to start researching what you want to buy. My suggestion is to go the ETF or Mutual Fund route so that you can spread your risk around.

Investing in one or two stocks in your IRA is just way too risky. Remember, this is the money that you will be accessing in your retirement, so you need to be careful. The way to safely increase your risk so that you can maximize your reward is to do it through ETFs and Mutual Funds that have a higher risk. This way, your money is spread across different companies and industries.

Next Steps

You’ve done the research, now it’s time to actually start the process! Check out my videos below to learn which IRA type is right for you, how to setup an IRA and the HUGE mistake you need to avoid.

FUNDRISE | Real Estate Investing

About Kamilah

My name is Kamilah and I am a native New Yorker of Caribbean descent who is passionate about helping you learn how to invest and build your net worth by sharing easy-to-follow YouTube tutorials that will help you take control of your money and set you up for financial success. But this wasn’t always my story.

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