An individual retirement account (IRA) is a type of retirement savings account that you open and contribute to on your own. This option allows you to grow your savings tax-free (you won’t have to pay taxes when you take from your account) or tax-deferred (you pay taxes when you take from the account). 

These accounts typically grow faster than other retirement savings accounts, and they can help you supplement your retirement savings you get in the form of a pension or 401(k). Plus, since these accounts require you to put your money into diversified investments, IRAs typically provide the widest array of potential investment options.

Types of IRAs

Want to open an IRA account? You have a few options to choose from. There are three main types of IRAs that you can open to start saving for retirement:

• Traditional IRA: This type of IRA account allows you to make untaxed contributions that you can report on your tax return. Any accrual of profit in your traditional IRA account is tax-deferred, meaning you’ll pay taxes on it when you withdraw during retirement. But you will be taxed on it based on your tax bracket in retirement, which frequently is lower than your current tax bracket now. That’s because it’s common for people to make less money in retirement than they do in their working life.

• Roth IRA: When a Roth IRA account is open in your name, you put in post-tax contributions, meaning you’re putting money into the account after you’ve paid taxes on it. So, you don’t have to pay taxes on your IRA withdrawals since you already paid taxes in the past. 

• Rollover IRA: This IRA account works in conjunction with your employer-sponsored account. When you max out your yearly or lifetime contributions to your 401(k) or 403(b), you can continue to contribute to retirement by “rolling over” the contribution amounts you would have put in the 401(k) or 403(b) to your rollover IRA instead.

How to Open and Use an IRA Account

You can use the following steps to learn how to open, contribute, and manage your IRA brokerage account.

1. Choose a financial institution. There are many banks, credit unions, and financial institutions like mutual funds and investment firms that offer IRAs, and you can even open an IRA account online. Some popular and trusted institutions include Charles Schwab and Fidelity Investments. Look for an organization that has good customer service and an easy-to-use account management system. Or, you might consider getting an IRA through your current bank or credit union to make it simpler.

2. Consider a robo-broker. Some online IRA accounts use a robo-broker to select your investments, which is a cost-effective option for people who aren’t experienced with investing. Or, you can go with an IRA account that has real people that offer advice to help you invest.

3. Connect your IRA brokerage account to a bank account. You can also connect your IRA account directly to your paycheck via whatever platform your employer uses for payroll. You can set it up so that a certain percentage or cash amount is deposited into your IRA automatically. Or, you can connect your IRA to your bank account so you can easily transfer money whenever it’s most convenient for you.

Max out your IRA contributions every year. Doing so will get you closer to your retirement savings goal either in time or faster. You may even be able to save more than you need per your retirement savings calculation, which means you may be more comfortable and prepared for financial emergencies.