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How To Set Up Your Own IRA: 6 Simple Steps To Start Saving For Your Retirement Today

How To Set Up Your Own IRA: 6 Simple Steps To Start Saving For Your Retirement Today

We all know we should save for retirement, but most of us keep putting it off.


We come up with some pretty clever excuses that keep us from taking action. Any of these sound familiar?

  • I don’t have the time
  • I don’t have the money right now
  • I don’t know how to invest for retirement
  • It’s just too complicated
  • I don’t want to mess up

Don’t worry … If you’ve said any of these, you’re far from alone. At one time or another, most of us have said something similar. Whether we’ll admit it or not is another story.  

The bad news is that these excuses keep us from taking action, prolong our inability to achieve financial freedom, and cost us thousands of dollars in potential compound interest.

So here’s the goal. I want to take away these excuses so we take action.

I’ll show how you can start saving for retirement today by setting up your own Individual Retirement Account (IRA).

As I do, you’ll see that setting up your own account doesn’t take much time (less than 30 minutes), it doesn’t take much money (less than $100), and it’s simple to set up(only 6 steps).

Don’t worry about messing up. The biggest mistake you can make is not doing it all.

So here you go. Here’s your simple step-by-step guide to set up your own IRA.

But First, What Is An IRA?

An IRA is a tax advantaged investment vehicle used by individuals to earn and save funds specifically for retirement.

You can think of it as a retirement savings account that provides you with tax breaks and interest. Since it’s an investment account, you’ll generate a heck of a lot more interest in your IRA than you would a typical CD, money market, or savings account. The compounding of this interest can lead to significant wealth accumulation.

But there is a catch. Since the government is offering a tax break, they require you to keep the money in the account until you’re 59 ½. If you take it out earlier, you’ll generally have to pay a 10% penalty.

There are some clever ways to avoid the 10% penalty though. I’ll have to cover them in more detail in a later post. But just to satisfy your curiosity, you can use a Roth IRA conversion ladder or rule 72(t) in the tax code to pull money out of an IRA before you’re 59 ½ without paying any penalty. These are two pretty slick strategies early retirement advocates use to access their money sooner than generally allowed.

Alright, now that you know exactly what an IRA is, let’s jump in and learn how to set up your own IRA account the right way.

Step 1: Select the Right Brokerage

A brokerage is a financial institution that facilitates the buying, selling, and holding of financial securities for investors. It’s essentially like a bank for your investments that enables you to have an IRA (and other types of accounts) and invest your money.

What Are the Most Important Considerations In Selecting the Right Brokerage

Not all brokerages are the same—some are great and others aren’t. Here are the most important considerations when deciding which brokerage is right for you.

  • Reputation Of the Firm: Are they well respected and highly recommended by trusted sources? What are they best known for? Are they well established in the industry?
  • Investment Options: What are your investment options? Can you invest in mutual funds, index funds, exchange traded funds, individual stocks and bonds, etc?
  • Fees: What are the fees you’ll be paying to use the brokerage? What’s the expense ratio and trading commissions for the funds you want to invest in? Do they charge a percentage of the assets they manage for you?
  • Account Minimums: What is the least amount of money you can invest to open an IRA?  
  • Research Tools: Does the firm offer research tools that will help guide your investing decisions?
  • User Friendly Platform and Interface: Is the firm’s website intuitive and easy to navigate?

Freedom Financial Coaches Recommendations for Brokerage

The three firms I recommend the most are Vanguard, Fidelity, and Charles Schwab. Each has a great reputation, strong investment options, and low fees.

I like Vanguard the most since they generally have the lowest fees and they offer my favorite investment options. With that said, I still highly recommend the other two.

I personally use Vanguard and Fidelity.

Step 2: Select the Right Type of IRA

There are primarily two types of IRAs—a Roth IRA and a Traditional IRA.

Roth & Traditional IRA

When deciding which type of IRA is best for you, you must consider several important factors such as the max contribution, tax treatment, withdrawal penalties, mandatory withdrawals, and various limitations with each type of IRA.

Max Contributions

With both Roth and Traditional IRAs, you and your spouse can each contribute a maximum of $5,500 ($6,500 if you’re over 50) per year. In other words, between you and your spouse, you can stock away $11,000 per year for retirement—not too bad.

Tax Treatment

A major difference between the Roth and Traditional is how they’re taxed. With a Roth, you pay taxes on the money you contribute up front, but all the compound growth is tax free. With the Traditional, you don’t pay taxes on the money you contribute today, but you’ll have to pay taxes on it and all the compound growth later when you withdraw the funds.

Roth Example 

Let’s say you contribute $5,000 into a Roth IRA and in 30 years your $5,000 grows to $50,000 (8% per year). You don’t get a tax deduction on the $5,000 you contributed originally, but you do get a tax break on the investment appreciation. You never have to pay a dime of taxes on the $45,000 gain as long as you don’t pull the money out of the account before you’re 59 ½.

Roth IRAs help you build tax free wealth, but here’s the downside. Since you have to pay taxes on your money upfront, you have less capital invested originally, so it takes longer for your investment to grow.

Traditional Example

Now let’s say you contribute $5,000 into a Traditional IRA and in 30 years your $5,000 grows to $50,000. With the Traditional IRA you get to reduce your taxable income by the $5,000 when you originally contributed the money, but you’ll have to pay taxes on that and the $45,000 gain when you withdraw the funds. Traditional IRAs help build wealth while reducing your current tax liability.

Roth and Traditional IRAs have the same net tax impact as long as your tax rate is the same when you contribute and withdraw your money. If you have a higher effective tax rate in retirement, than a Roth IRA saves you more on taxes. If you have a lower rate in retirement, than a Traditional IRA will save you more when it comes to taxes.

Withdrawal Penalties

This is another pretty significant difference between Roth and Traditional IRAs. Generally, you have to pay a 10% penalty on the money you withdraw from your IRA before you’re 59 ½.

However, with a Roth IRA you can withdraw the money you actually contributed, not the interest earned but the principal you originally invested, tax and penalty free even if you pull it out before you’re 59 ½. If you withdraw earnings early however, you’ll get hit the 10% penalty, so you don’t want to do that.

If you withdraw anything, principal or earnings, early from a Traditional IRA, you’ll get hit with taxes and the 10% penalty.

Generally, it’s not a good idea to withdraw money early from your retirement (unless you are retiring early and you have a early withdrawal strategy in place), but being able to withdraw principal penalty free is an advantage of Roth IRAs.

Mandatory Withdrawal

Another difference between Roth and Traditional IRAs is that you are required to start withdrawing money from your Traditional IRA after you turn 70. The withdrawals are mandatory with Traditional IRAs since they never collected any tax up front. It’s Uncle Sam’s way of ensuring he gets paid.

There is no such mandatory withdrawal with Roth IRAs.

Income & Deduction Limitations

Now there are some other limitations around IRAs. If your income is too high, you won’t be able to directly contribute to a Roth IRA, or you may not be eligible to deduct your contributions into a Traditional IRA on your taxes. There are some strategies to get around some of the limitations like a backdoor roth, but that will have to be a post for another time.

Roth IRA Limitations 

How much you can contribute depends on your income and tax filing status.


Charles Schwab
  • Married Filing Jointly: The amount you can contribute to a Roth IRA starts to phase out (is limited) after your Modified Adjusted Gross Income (MAGI) exceeds $187,000 and you are no longer eligible to contribute after it passes $196,000.
  • Single Filers: The amount you can contribute to a Roth IRA begins to phase out as your income exceeds $119,500, and you are no longer eligible to contribute after it exceeds $133,000.


Traditional IRA Limitations 

How much of your contribution you’re able to deduct depends on your income and if you or your spouse is covered by a retirement plan at work.


  • Single & Head of Household Filers: The phase out range for 2017 is $62,000 – $72,000.
  • Married Filing Jointly Where One Spouse’s IRA Contribution is Covered by a Workplace Retirement Plan: The income phase-out range for 2017 is $99,000 – $119,000.
  • Married Filing Jointly For Spousal IRA Contributions: The deduction is phased out if the couple’s income in 2017 is $186,000 – $196,000.

What Type of IRA Is Right For You?

It depends.

It depends on your eligibility, your tax strategy, your lifestyle, your investment strategy, your expected retirement tax rate and strategy, and and your other goals.

Here are a few questions to help guide your decision.

  • Are you eligible for a Roth IRA? If not, then obviously invest using a Traditional IRA.
  • Do you expect your tax rate to be higher or lower during retirement? If you expect it be lower, a Traditional may be better. If you expect it to be higher, a Roth could save you more.
  • Are you currently in a high tax bracket and wanting to lower current tax liability? If so, contributing to a Traditional IRA would most likely reduce your tax burden.
  • Are you planning on retiring early? If so, you may want to invest using a Traditional IRA for now and then use a Roth Conversion Ladder when it’s time to retire.
  • Do you have a higher risk tolerance? How easily can you stomach the ups and downs of the market? If the inevitable ups and downs of the market don’t bother you too much then you may be better off using a Roth IRA. Here’s why: Riskier investments have bigger ups and bigger downs, but generally, they tend to generate stronger returns over the long haul. And since you don’t have to pay taxes on the investment appreciation with a Roth IRA, these “riskier” investments may create more after tax wealth.
  • Do you expect your income to go down during retirement? If so, then maybe you’re tax rate will too and a Traditional IRA could be more advantageous. For most folks, their income decreases significantly during retirement.
  • Do you expect tax rates to go up in the future? If so, then a Roth IRA may be better. It’s hard to project what’s going to happen to tax rates. With all the government spending it’s hard to believe rates will go down significantly, but overtime, they have remained pretty consistent as a percentage of GDP.
  • Do you think you’ll need to access any of the funds before you’re 59 ½? If so, then a Roth IRA may be better since you can withdraw your contributions tax and penalty free.
  • Do you care about the mandatory withdrawal requirement for Traditional IRAs? If so, then you’ll want to factor this into your decision.

Freedom Financial Coaches Recommendations for IRA Type

There are obviously a lot of unknowns and a lot of variables that go into the decision of whether a Traditional or Roth IRA is best. You have to look at your risk tolerance, your current tax bracket, your expected tax rate, and whether reducing taxes now or later is more important to you.

With that said, if you expect to be in the same or lower tax bracket and you think you’d pick the same investments generating the same returns, then I would generally recommend using a Traditional IRA.

However, if you expect to have a higher tax rate at retirement, or you think you’d pick more aggressive funds that would generate stronger returns then I would probably recommend going with a Roth IRA.

Either option is a good choice. And since choosing the best IRA type requires you to know the future, which is impossible to do, it’s probably not a bad idea to have both types of accounts. That’s what I do.

Having both types of IRAs works especially well since you’re not always in the same tax bracket earning the same income throughout the different stages of your life.

There is not a strategy that works best for your whole life. Rather the best IRA strategy is dependent on and specific to what financial stage you’re on at a specific time of your life. You are not stuck to one account type throughout your entire life. Your strategy can change as your finances change.

Step 3: Select the Right Investment For Your IRA

There are many different types of investments you can use to build wealth in an IRA. Each different type has it’s respective pros and cons.

Most Important Considerations

Here are the most important factors to consider when determining which investment is best for you.

  • Your Goals. Why are you investing? Are you trying to preserve wealth or generate wealth? How big of returns are you needing to achieve your goals? What are you wanting to do with the money?
  • Your Time Horizon. How long do you plan on having the funds invested? Are you going to need to access the money within 5, 10, 20, or 30 years from now?
  • Your Risk Tolerance. How do the ups and downs of the market impact you?
  • The Investment’s Track Record. How well has the investment performed in the past?
  • The Investment’s Expected Outlook. Is the investment expected to increase or decrease relative to your respective time horizon?
  • The Investment’s Fees. What is the expense ratio (stay lower than 0.25%)? Are there any loads associated with the fund? Do you have to pay brokerage commissions when you invest in this particular fund?
  • The Investment’s Risk Profile. How volatile is the investment? Is the investment built of small, medium, or large companies?
  • The Investment’s Diversification. Are you investing in one company or multiple companies across multiple industries, sectors, and regions? How many asset classes are included in the investment? Diversification is imperative as it reduces risk.

Available Investment Options

Here are some of the most common investment options you have available within an IRA along with the respective pros and cons.

  • Stocks. Stocks represent ownership in a company. They have a strong track record over long periods of time, but they are inherently more risky due to their volatility. Their ups are better than bonds, but their downs are more damaging. If you have a long time horizon, then you generally should have a large portion of stocks in your IRA. With that said, buying individual shares of stock within an IRA is too risky and expensive as it significantly reduces your diversification and brokerages normally charge around $5 to $10 every time you buy or sell individual stocks.
  • Bonds. If you buy a bond then you are essentially loaning money to a company or a government. Bonds are less volatile and less risky than stocks, but they haven’t generated the strong returns to investors that stocks have. Bonds are typically used more for preserving wealth than they are for creating it. They are best used for shorter time horizons and diversification.
  • Certificates Of Deposit (CD). CDs generate low returns but significantly reduce the risk of losing money.
  • Mutual Funds. A mutual fund is a collection of diversified investments that are professionally managed. Here’s how it works—you buy a specific mutual fund and get a professional to manage your money. The money managers buy and sell specific stocks and bonds. These funds are generally well diversified, but they are expensive since you’re having to hire a “professional” to pick stocks. In addition, they haven’t generated strong enough returns to justify the cost. In a 10 year period, 98% of the pros fail to beat the market.
  • Index Funds. An index fund is a diversified portfolio built to mimic the performance of a specific market index, such as the S&P 500. When you buy one share of an index fund, you are essentially buying a piece of every company within that index. Index funds are well diversified, have generated strong returns, and bear low fees. Generally, they are the ideal choice, but sometimes they require higher minimum initial investments ($2,000 – $3,000).
  • Exchange Traded Funds (ETF). ETFs are similar to mutual funds and index funds but they are able to be bought and sold throughout the trading day. ETFs are generally well diversified, have low fees, and can generate strong returns. They normally require a lower minimum initial investment than index funds, so they may provide a good starting point unless you have around $2,500 – $3,000 to open an index fund initially.  

Freedom Financial Coaches Recommendation

The best investment for your IRA is normally a mix a different Index funds. Index funds have significantly lower fees than most other options and have generated stronger returns than most of their counterparts over the long haul. Selecting several different index funds from different asset classes and regions should provide adequate diversification and risk reduction. In addition, they are easy to understand, straightforward to set up, and simple to manage.

Check out The Best Way To Invest In the Market for more details as to why I recommend using index funds.

If the minimum initial buy in of an index fund is too high with your desired brokerage, consider investing in indexed ETFs. You can essentially get the same diversification, fees, and returns as the typical index fund for a short period of time. And then when your ETF surpasses the minimum buy in of your desired index fund, transfer the balance and buy the index fund.

Step 4: Purchase the Right Investment

Now that you’ve selected the right investment, go ahead and buy it. Invest for your future!

Here are the general steps:

  1. Create an account with your desired brokerage
  2. Select your investment vehicle (retirement account)
  3. Select the right type of IRA (Roth or Traditional)
  4. Fund your account (bank transfer)
  5. Buy your selected investment that’s right for you

Congratulations! Have fun watching your money grow

Step 5: Automate Monthly Contributions To Your IRA

This step is crucial so don’t skip it. It’s the key to generating automatic wealth.

If you don’t establish automatic monthly contributions into your IRA then it’s not very likely that your account will accomplish what you need and hope it will.

Most folks that don’t automatically invest money every month fail to invest as much as they need to achieve their goals. Their investing becomes an afterthought—something they do if money is left over. Don’t let your future become an afterthought.

In addition, automatic monthly contributions help you beat a volatile market. Yes, investing money every month means that you will sometimes buy when the market is high, but it also ensures you’ll buy low. On average, the returns of those who have invested each month crush those who try time the market or invest lump sums.

Do yourself a favor. Automate your investing and generate automatic wealth.

Step 6: Evaluate and Rebalance Your IRA Annually

So this step isn’t directly involved with the setup of your IRA, but it’s necessary to ensure your IRA’s long-term success.

Every year you want to evaluate the performance of your IRA and ensure it’s generating returns consistent with its benchmark. You want to ensure your account is growing as expected so your retirement plans aren’t thrown off track.

In addition, you’ll want to evaluate the asset allocation and diversification of your IRA and rebalance it according to your goals, risk tolerance and time horizon. If retirement is a long ways off, you’ll want more stock based index funds. If retirement is getting near, you may consider holding a higher portion of index fund bonds in your portfolio.


An IRA is a great account to save for your future. It enables you to generate tax advantaged wealth, so you can have the future you hope for.

In order to get the most out of your IRA you want to set it up correctly using the brokerage, account type, and investment option that’s right for you. Follow these steps to ensure you get the most out of your IRA.

Action Steps

Don’t fall victim to the excuses that keep us from saving for retirement. Take action! Follow these steps and start investing for your future.

  1. Select the Right Brokerage (Vanguard, Fidelity, Charles Schwab)
  2. Select the Right Account Type (Roth vs Traditional IRA)
  3. Select the Right Investment (Index Funds or ETFs)
  4. Purchase the Right Investment
  5. Automate Monthly Contributions Into Your IRA
  6. Evaluate & Rebalance Your Portfolio Annually

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