Individual Retirement Accounts (IRAs): What They Are and How to Open One

Individual Retirement Accounts (IRAs), also known as individual retirement arrangements, are savings accounts that offer tax advantages to help people put aside money for retirement. These accounts hold a variety of investments, including stocks, bonds, and mutual funds, and they are open to anyone with earned income.

Even if you don’t have access to a workplace retirement plan, you can open an IRA independently. Below, we’ll cover:

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What Is an IRA and Who Should Consider One?

An IRA is a type of account that lets you save for retirement with some helpful tax benefits. You put in money you’ve earned from working, and that money grows over time through investments like stocks, bonds, or mutual funds. The goal is to build a nest egg you can use in retirement.

IRAs are great for people who don’t have access to a retirement plan at work, like freelancers or small business owners. They’re also useful if you already have a 401(k) and want to save more. Since you can open an IRA through banks, investment companies, robo-advisors, and even mutual fund companies, they’re flexible and easy to access regardless of how involved you plan to be.

There are four main types of IRAs, each works differently. The best one for you depends on how you earn money, how much you make, and what kind of tax benefits you’re looking for. Below is a quick breakdown of each option.

Traditional IRA

A Traditional IRA lets you make contributions that may be tax-deductible, depending on your income and if you have a workplace retirement plan. Your investments grow tax-deferred, and you’ll pay taxes when you take money out in retirement. This type of IRA is often a good match if you’re looking to lower your taxable income now and expect to be in a lower tax bracket later.

Roth IRA

Roth IRAs are funded with after-tax money, so there’s no tax break up front. However, your investments grow tax-free, and you can withdraw the money tax-free in retirement. In 2025, you can make the full contribution if you earn less than $150,000 (single) or $236,000 (married). Roth IRAs are best for younger earners or anyone who expects to pay higher taxes later on.

SEP IRA

A SEP IRA, or Simplified Employee Pension, is designed for self-employed people and small business owners. Only the employer contributes to the account, and those contributions are tax-deductible. SEP IRAs are popular with freelancers or business owners who want to save more than the limits of a Traditional or Roth IRA allow.

SIMPLE IRA

SIMPLE IRAs (Savings Incentive Match Plan for Employees) are meant for businesses with 100 or fewer employees. Employers must contribute, either by matching 3% of an employee’s pay or making a flat 2% contribution for everyone.² SIMPLE IRAs give small businesses an easy way to offer retirement benefits without the cost and difficulty of a 401(k). 

Eligibility Rules and Contribution Limits

Before putting money into an IRA, you need to know who can contribute and how much you can add each year. These rules vary depending on the type of IRA you choose and can change from year to year. These sections will cover all of the details you need to know before you jump in.

If you have earned income, you can contribute to a Traditional IRA. There’s no income cap. However, whether your contribution is tax-deductible depends on your income and if you have a retirement plan through work. Roth IRAs do have income limits, so higher earners may not qualify for direct contributions. If you’re self-employed or run a small business, SEP and SIMPLE IRAs are also available to you.

In 2025, you can contribute up to $7,000 across all your IRAs if you’re under 50.³ If you’re older than 50, you can add an extra $1,000 as a catch-up contribution for a total of $8,000.⁴ These limits apply to your total contributions across all IRA accounts (not per account), so be sure to keep track.

Income Limits for Roth IRA Contributions

Roth IRA eligibility is based on your income and tax filing status. Here’s a quick breakdown:

• In 2025, single filers can make full contributions if they earn under $150,000, with a phase-out ending at $165,000. 
• Married couples filing jointly can contribute fully under $236,000, with a phase-out ending at $246,000⁵. 

If you earn too much to contribute directly, a backdoor Roth strategy may be worth checking out. 

Opening an IRA is not as difficult as you might think. You can typically do it in under an hour. These five steps will take you through what to do, whether you’re opening one for the first time or switching from another account. 

Step 1: Decide Which Type of IRA is Right for You

Begin by selecting the kind of IRA that aligns with your needs. A Traditional IRA may make sense if you want a tax break now and expect to be in a lower tax bracket later. If you’d rather pay taxes now and enjoy tax-free withdrawals later, a Roth IRA might better suit you. Those who are self-employed or own a small business, might want to look into a SEP or SIMPLE IRA instead.

Step 2: Choose a Provider

You can open an IRA through online brokers, robo-advisors, or even through a bank or mutual fund company. When comparing options, look at fees, investment choices, account minimums, and how easy the platform is to use. Most top providers offer low or no fees and don’t require a minimum to get started. 

Step 3: Complete the Application

Many providers let you open an IRA online, and the process typically takes around 15-30 minutes. You’ll need basic info like your Social Security number, employment details, a government-issued ID, and the name of your beneficiary. The process is secure and straightforward on most platforms.

Step 4: Fund Your Account

Once your account is set up, you’ll need to add money to it. You can transfer funds from your bank, send a check, or roll over from another retirement plan like a 401(k). You don’t need to deposit a large amount immediately. Even small contributions are a good start.

Step 5: Select Your Investments

After funding your account, it’s time to choose your investments. Common options include stocks, bonds, mutual funds, ETFs (Exchange-Traded Fund), and CDs (A Certificate of Deposit). Try to match your investment choices to your goals, timeline, and comfort with risk. 

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Where to Open an IRA

Where you open your IRA determines how easy it is to manage your account, what investment options you have, and how much you pay in fees. Do you want to be hands-on or let someone else do the work? There’s a provider that matches your style.

Best Options for DIY Investors

If you like to be in control of your investments, online brokers are great options. They offer no account minimums, zero-commission trades, and plenty of research tools to help you make decisions. These platforms are good for investors who desire flexibility without high costs.

Best Options for Hands-Off Investors

For a more hands-on approach, consider robo-advisors. These services build and manage a portfolio for you based on your goals and risk level. Many offer helpful features like automatic rebalancing, tax-loss harvesting, and even access to financial planners if you need more support. 

Special Features Offered by Top Providers

Some providers offer extra tools and features to help you make the most of your IRA, such as:

• Goal tracking
• Financial planning resources
• Access to human advisors 

At Savvy, our experts prioritize aligning your IRA strategy with your broader financial goals, giving you more than just an investment account. It’s part of a bigger plan.

Managing Your IRA Over Time

Opening an IRA is a great first step, but it doesn’t stop there. To get the most out of your account, you’ll want to make regular contributions, stay on top of your tax forms, and know how withdrawals work in the future. Here’s how to manage your IRA as your financial life develops.

Make Regular Contributions

Adding to your IRA consistently, be it monthly, quarterly, or annually, is how you’ll see results over time. Even small, steady contributions can grow through compound interest. You can fund your IRA through bank transfers, rollovers, checks, or wires.

Understand IRA Tax Forms (5498, 1099-R)

Each year, you’ll get a couple of important tax forms related to your IRA. Form 5498 shows how much you contributed during the year. It’s for your records and doesn’t need to be filed with your tax return. Form 1099-R is used if you took money out of your IRA, and that one does need to be reported when you file. 

Know the Rules on Withdrawals and RMDs

Usually, you can’t take money out of an IRA before age 59½ without a 10% early withdrawal penalty (though there are some exceptions). Traditional IRAs require you to start taking required minimum distributions (RMDs) at age 73⁷. On the other hand, Roth IRAs don’t require RMDs during your lifetime, making them a more flexible option for many retirees. 

Putting It All Together: IRA Basics and Beyond

IRAs are a powerful tool to help you save for retirement, regardless whether you’re just starting out or looking to see long-term savings. They’re flexible, widely available, and offer valuable tax benefits based on your needs and goals.

Key Takeaways:

• There are different types of IRAs, each with its own rules and perks.
• Contribution limits and income eligibility can change each year, so it’s important to stay up to date.
• Opening an IRA is simple, and managing one is all about consistency and understanding the basics.
• Choosing the best provider depends on how involved you want to be with your investments.
• Making regular contributions and knowing how withdrawals work will keep your account on track over time. 

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