How much money does it take to start an IRA? The easy answer is $0, but that won’t get you on your way to growing your money into retirement. The truth is, you can start an IRA with very little money.
IRAs are easy to start. Just open up a great online brokerage account. My personal favorite right now is M1 Finance.
Keep in mind that there are actually two main types of IRAs to consider, so make sure you understand which one you are eligible for.
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Which IRA Am I Eligible For – Traditional or Roth?
Virtually anyone can contribute to an IRA: Roth or Traditional. The most basic requirement is that you have earned income. The difference between the two is based on when you’ll pay taxes.
A traditional IRA allows you to grow your money tax-free over time. You won’t pay income taxes on your account until you begin taking distributions in retirement age or when you’re at least 59 ½.
You may be able to deduct your contributions on your taxes if you meet specific filing status and income requirements.
With a Roth IRA, on the other hand, you’ll contribute income that has already been taxed, so you don’t get a tax deduction right off the bat. Your money will grow tax-free, however, and you won’t have to pay income taxes on your account once you begin taking distributions in retirement.
Here is a tool to help figure out what type of IRA you’re eligible for:
Understanding Traditional vs Roth IRA
|TRADITIONAL IRA||ROTH IRA|
|Contribution Limits||$6,500 Total Across All IRAs In 2023; If You Are Ages 50 And Older, You Can Contribute $7,500||$6,500 Total Across All IRAs In 2023; If You Are Ages 50 And Older, You Can Contribute $7,500|
|Who Can Contribute?||Anyone Who Earns an Income and Is Under the Age of 73||Anyone Who Earns an Income|
|Do Income Caps Apply?||Income Caps Limit Who Can Deduct Contributions on Their Taxes Unless They Don’t Have a Retirement Plan Through Work||Income Caps Limit Who Can Contribute|
|How Do Taxes Work?||You’ll Pay Taxes on Distributions Once You Begin Taking Them in Retirement||Your Distributions Will be Tax-Free Once You Reach Retirement Age|
|Who Is This Account Best For?||Anyone Who Can Deduct Contributions and Wants to Reduce Their Taxable Income||Someone Who Wants Tax-Free Income in Retirement|
How Much Money Does It Take To Start an IRA?
Now you know what type of account to open, so how much do you invest? Technically, you don’t need anything to open an IRA since the Internal Revenue Service (IRS) doesn’t set minimum contribution limits — only annual maximums.
However, individual brokerage firms have minimum requirements, and you want to employ a healthy contribution strategy to maximize rewards.
When it comes to your contributions, remember that the important thing is to just get started. Small amounts of money can add up over time, and from there, compound interest can do its magic and help your account balance balloon.
Here’s one way to think about it:
IRA Contribution Illustration
|IRA Monthly Contribution||IRA Annual Contribution|
Let’s say you’re 30 years old, and you contribute $100/month for a total of $1,200 a year to your Roth IRA. By the time you’re 67 and ready to retire, you’ll have saved $204,000 that won’t be subject to income taxes. That can go a long way to support a happy retirement.
Now that you understand the process a bit more figure out which brokerage firm to use for your IRA and how much you need to actually open an account and get the ball rolling.
Once your account is up and running, you can figure out how much to contribute regularly, whether that’s $100 per month or $100 per week.
How Much Does It Cost to Open an IRA?
The cost to open an IRA can vary depending on the financial institution or brokerage firm you choose. Some institutions may have no account opening fee, while others may charge a one-time fee or an annual fee. Some firms may also have minimum deposit requirements to open an account.
As an example, M1 Finance requires a $500 minimum investment in their Roth IRA. Depending on the mutual fund you choose, Vanguard requires at least $1,000 for their Target Retirement funds and up to $3,000 for their other funds.
In addition to account opening costs, there may be ongoing fees associated with an IRA account, such as annual maintenance fees or fees for certain transactions.
It is also important to note that while Traditional IRA or Roth IRA contributions may be tax deductible or not taxable, there are limits to how much you can contribute annually.
How to Start Investing in an IRA
1. Compare Online Brokerage Firms That Offer IRA Accounts
Different online brokerage firms have features that you’ll want to pay attention to. Some are better for hands-off investing, while others are better for those who want to get their hands dirty and really dig in.
Here are some of the things you should ask yourself when choosing a brokerage:
1. Would you rather be hands-on or hands-off with your account? A robo-advisor may take the burden off you when it comes to managing your investments.
2. What sort of investments do you want to buy? Pay attention to the limitations of the broker.
3. How much are you looking to invest off the bat? Fees and commissions can eat away at early earnings if the initial investment is too small.
Here are some of our favorite options:
- $0 per trade
- $0 set up / $100 invest
- $0 annual
- $0 per trade
- $0 mutual fund
- $0 set up
- 0.25%-0.40% account balance annually
- $0 per trade
- $9.95 mutual fund
- $0 set up
- $0 annual
M1 Finance IRAs also come with no hidden fees, the option to invest in fractional shares, and a helpful mobile app that lets you monitor your account growth no matter where you are.
2. Fund Your Account
Now, it’s time to put the minimum amount in to fund your brand-new account. As previously mentioned, different brokerages have different minimum requirements, so
3. Select Your Investment Strategy
Your next step is building a system that will allow you to seamlessly build wealth over time. This means figuring out how much you can afford to invest in an IRA each month, but it also means choosing investments that will exist within your IRA.
If you find you are able to deduct contributions to a traditional IRA because your employer doesn’t offer a retirement plan, you should strive to contribute as much as you can each month up to the $541.67 monthly (and $6,500 annual) limit.
That way, you’re building up retirement funds in a hurry while maximizing tax advantages.
If you opt for a Roth IRA instead, you won’t get any tax advantages now, but you will later on since you won’t have to pay income taxes on distributions once you reach retirement age.
Either way, the ultimate goal is striving to invest as much as you can each month up to account limits, and without harming your other financial goals.
In terms of selecting your portfolio, this component of your system depends a lot on which investment platform (brokerage firm) you choose to go with. If you choose an online broker and decide on stocks as a key part of your portfolio, you could benefit from dollar-cost averaging.
Here’s an example of dollar cost averaging into an individual stock with a fluctuating price:
Benefits of Dollar Cost Averaging
|Month||Share Price (In $)||Shares Bought|
|Avg. Price Per Share||$14.25|
|Avg. Cost Per Share||$14.05|
Some firms like M1 Finance let you set up “pies” of investments that are based on fractional shares.
With M1 Finance, you can build your own “pie” from more than 6,000 available stocks and funds, but you can also choose from “Expert Pies” that have been put together by in-house investment professionals.
That’s just one way this can work, but there are plenty of other ways to set up a portfolio depending on the firm you choose. For example, let’s imagine you decide to open an IRA with Betterment.
You’ll start by answering some basic questions about yourself, including your age, your income, and when you plan to retire. From there, Betterment will suggest a specific investment plan that is formulated to help you achieve your goals.
4. Make It Automatic
To help in your effort to contribute consistently and to remove some of the pressure, consider making your investments automatic with the click of a button.
Many of the top brokerage firms let you set up automatic investments through their mobile apps or online platforms, including Betterment’s example below.
5. Check In Regularly and Stay on Track
Part of the fun of putting away money for your future is watching it grow. Keep an eye on your portfolio to make sure you’re contributing the way you want to.
It can be tempting during tighter financial times to stop contributing, but you can always reduce your contribution amount depending on your circumstances and then change it back later.
Don’t worry about small fluctuations, and seek help from an advisor if necessary.
Know the IRA Rules
Whether you opt for a traditional IRA or a Roth IRA, you should know that plenty of rules dictate who can contribute, how much can be contributed each year, and whether contributions are tax-deductible.
With a Roth IRA, the rules are as follows:
- Roth IRA contributions are made with after-tax dollars, so they are not tax-deductible.
- Your money will grow tax-free until you reach retirement age, and you won’t pay income taxes on your distributions when you retire.
- You can remove contributions to your Roth IRA from your account at any time before age 59 1/2, but you cannot take out any earnings without a penalty until then.
- Married couples filing jointly can contribute the full amount to a Roth IRA, provided their modified adjusted gross income (MAGI) is below $228,000. Those with incomes between $218,000 and $228,000 can contribute a reduced amount. Those with incomes over $228,000 cannot contribute.
- Single tax filers can contribute the full amount to a Roth IRA provided their modified adjusted gross income (MAGI) is below $153,000. Those with incomes between $138,000 and $153,000 can contribute a reduced amount. Those with incomes over $153,000 cannot contribute.
With a traditional IRA, the rules are as follows:
- Money invested in a traditional IRA grows tax-free. However, you will pay income taxes on distributions once you reach retirement age.
- If you are covered by a retirement plan at work and you’re single, you can deduct contributions to a traditional IRA if your MAGI is below $73,000.
You can claim a partial deduction if your MAGI is between $73,000 and $83,000. For those with incomes over that amount, contributions cannot be deducted from your taxes.
- If you are covered by a retirement plan at work and you’re married and filing jointly, you can deduct contributions to a traditional IRA if your MAGI is below $116,000.
You can claim a partial deduction if your MAGI is between $116,000 and $136,000. For those with incomes over that amount, contributions cannot be deducted from your taxes.
- If you are single and don’t have a retirement plan at work, you can deduct the full amount of your contributions to a traditional IRA regardless of your income.
- If you’re married filing jointly and your spouse is covered by a retirement plan at work but you’re not, you can deduct the full amount if your MAGI is below $218,000.
Those with MAGIs between $218,000 and $228,000 can deduct a reduced amount. Anyone with a MAGI of $228,000 or higher cannot deduct IRA contributions on their taxes.
Summary of How Much to Start a Roth IRA
Opening an IRA is a great way to save more money for retirement and the future, and that’s true whether you opt for a traditional IRA or a Roth IRA. Just remember that each type of IRA has pros and cons, and you’ll need to consider your tax situation now and what it might look like later.
Still, you shouldn’t get so caught up in the rules and minutiae of these accounts that you fail to open one altogether. Do some basic research, then decide which brokerage firm will meet your needs the best.
From there, open an account and start contributing as much as you can. The rest of the details will work themselves out, but only if you get started.