An Individual Retirement Account (IRA) is one of the best tools out there to maximize your retirement savings. It is a tax-advantaged investment account aimed at helping people build financial security.
While IRAs are generally used by people who don’t have access to a 401(k) or other employer-sponsored retirement plan, anyone with earned income is eligible to open an IRA. That said, knowing the ins and outs of IRAs is important.
Here’s everything you need to know before opening an IRA online:
Types of IRA: Know Your Options
First off, you need to understand how different types of IRAs work. Here are four types you should know before you open an IRA account online:
Traditional IRA
As the name indicates, it is the simplest form of an IRA. All contributions may be tax-deductible in the year they’re made. The best part? Your earnings grow tax-deferred, which means you don’t have to pay taxes upon withdrawal.
Roth IRA
With a Roth IRA, you make contributions with after-tax dollars, and they are not tax-deductible. The result? Your earnings grow tax-free. A Roth IRA is excellent for anyone expecting to be in a higher tax bracket after retirement and who wants tax-free income.
Rollover IRA
A Rollover IRA involves moving funds from an old employer-sponsored retirement plan (like a 401(k)) into an individual IRA. This can help consolidate your savings into one account.
Other Types
Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA are designed for self-employed individuals and small business owners to make larger contributions than traditional or Roth IRAs.
Latest Contribution Limits
Next, know and compare the contribution limits for each type of IRA.
Let’s discuss the most common types: Traditional IRA and Roth IRA holders can contribute up to $7,000 in 2025. If you’re 50 or older, you can contribute $8,000. This is known as a catch-up.
If you or your spouse has a retirement plan at work, such as a 401(k), the amount you can deduct is phased out once your income exceeds certain levels.
Choosing the Right IRA Provider
Choosing the right provider is super important when you’re opening an online IRA. You have two options:
Brokerage firms
Traditional brokerage firms offer a range of investment options and self-directed accounts. This includes stocks, ETFs, mutual funds, and even bonds. Benefits of working with brokerage firms include:
- greater flexibility
- detailed research tools
- optional financial advisor services
Robo-Advisors
Robo-advisors are automated investment platforms that manage your IRA using algorithms, risk tolerance, and financial preferences. These are designed to build a diversified portfolio so your contributions and earnings are not affected by market fluctuations.
The main advantages of robo-advisors include:
- low minimums
- automatic portfolio rebalancing
- better decision-making
- hands-off approach
As a beginner, consider investing with a robo-advisor from SoFi. It will build and manage a custom portfolio for your IRA, helping you achieve financial freedom during retirement.