How to Open an IRA

This "dividend", AKA our blog, comes in response to a TikTok question from Amanda Rose asking us to explain IRAs more! Here is our step-by-step guide on how to choose between a Roth and Traditional IRA and next steps! Opening an Individual Retirement Arrangements (IRA) is a smart and effective way to start building wealth for your golden years. In this blog post, we will walk you through the essential steps involved in opening an IRA and provide valuable insights to help you make informed decisions along the way. (Side note: you may be thinking, IRA is an acronym standing for individual retirement account not arrangement. I thought that as well at one point, however, the IRS calls these tax havens an 'arrangement" therefore, we are using the proper name) 

Steps for opening an IRA:

Are you eligible to contribute to an IRA? To contribute to your IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. If yes, please proceed. If no, I am sorry but your IRA journey ends here. Translation: do you have W2 income or income from a business you run? If you have income from dividends or interest income, this does not count.

For 2023, the maximum contribution limit is $7500 if you are over 50 and $6500 if you are under 50.

Step 1: Choose your account type

Are you going to open a Traditional or a Roth IRA?

Traditional IRAs offer an upfront tax deduction benefit if you fall into the income limitations. Choose this if you need tax benefits today (you’re in a high tax bracket now) and expect to be in a lower tax bracket when you start withdrawing (which would be in retirement). Choose the Roth IRA if you expect your tax bracket to go up (especially when you start withdrawals). Roth IRAs are really great for the fresh out of college entry level jobs and/ or if you do not need those tax breaks! Please do not get discouraged if you are starting late. You have time! The market was up 40% in 2023.

For the Traditional IRA: Check the deduction limits here if you are enrolled in an employment sponsored retirement plan, and here if you are not.

For the Roth IRA: Not everyone can contribute to a Roth IRA please use this hand dandy table! You can find more information here.

Step 2: Choose your brokerage firm

Brokerage firms offer a variety of features for FREE for the self-directed investor. Stockbrokers.com is the best non-biased resource to help you choose which firm is best for you. Here is the link for IRAs.

Step 3: Fund your account

Once you open the account, you need to link your bank account and start making your contributions. If you cannot contribute the full amount. It is a best practice to take the full amount you can contribute and divide it into monthly/ bi-weekly payments. This was you can start getting the benefits of compound interest!  You have until the tax deadline to make your full contribution for that tax year. So like put in your full $6500 for 2023 by April 15th of 2024 (the tax deadline).

Step 4: Choose your Investments, otherwise it will be in CASH

Once your account is funded, it will sit in cash until you make an investment decision. You can choose a variety of investment vehicles within your IRA. Most investment gurus choose passive funds that mirror the market. You can find investment ideas using a stock screener, ETF screener, or curated stock list. All tools provided by your brokerage firm.

We like idea builder — the UI is AWESOME! And it makes it easy to find ideas and is less overwhelming than a traditional screener.

An important lesson in investing for all of our new financial enthusiasts out there. Investing does involve risk — meaning you could lose ALL of what you invested. However, that risk can be reduced by diversifying. Basically, if you own one dress, the risk of it being worn down and rendered useless is very high. But, if you have a diverse wardrobe with various dresses for various seasons, with the proper care you can make that wardrobe last you a long time! Investing is just the same. That is why at Market MakeHer we teach you how things work so you can have investment pieces in your wardrobe that last a lifetime. I know when I dress well, I feel more confident. The same is applied with investing.

When you invest, you are accepting volatility. Which means you are going to see your money go up and down. Look at the S&P 500 for the past 20 years (see chart below), if you invested during these peaks you would have thought it was a mistake, but in all reality as time progressed you eventually re-cooped your losses - and then some. AND if you invested on the way down you started a process called dollar cost averaging that really put your money to work. As much as I disagree with the teachings of Tori Dunlap, she says one thing I agree with: the amount of time in the market is more important than the amount of money. Also, past performance is not indicative of future results.