An IRA, or Individual Retirement Account, is a tax-advantaged account that helps you save for retirement. Saving for retirement is crucial no matter how young you are. So if you're wondering how to get started with an IRA, you've come to the right place. Here I outline four key steps to opening an IRA.

1. Decide which type of IRA you want to open

There are two types of IRAs you can open: a Traditional IRA or a Roth IRA. These describe the kind of tax benefit you get from the account.

Traditional IRA

A Traditional IRA lets you contribute money and deduct those contributions from your taxes. So your tax advantage comes now. You only have to pay taxes when you make a withdrawal.

Pros

• You don't have to pay taxes on your contributions. So you have extra money in your pocket today.
• Anyone can contribute regardless of income, although the tax benefit decreases for higher incomes.

Cons

• You have to pay taxes on withdrawals.
• If you make over $77,000 or if you have an employer-sponsored 401(k), then you can only deduct some or none of your contributions from your taxes.
• You must wait until 59 ½ to withdraw any money without penalty.

Roth IRA

With a Roth IRA, you pay taxes on your contributions, but you don't have to pay taxes on your withdrawals. So the tax advantage comes later.

Pros

• You don't pay taxes on withdrawals.
• You can withdraw contributions at any time without penalty.
• There are no required minimum distributions (RMDs).

Cons

• You have to pay taxes today.
• If you make more than $150,000 your contributions are limited. If you make more than $165,000 you cannot contribute.

So which should you choose?

For the most part, this comes down to whether you think your tax rate will be higher in retirement than it is now. If your tax rate will be higher in retirement, then you will want the Roth option. You can't be sure, but it's not a bad bet that it will be, especially if you are relatively young.

So for that reason, along with the more lenient withdrawal rules, I recommend a Roth IRA for most people. If you make more than $165,000 as an individual then you'll have to choose a traditional IRA.

2. Decide which type of investor you are

You can be one of two types of investors based on how you want to manage your investments. Most people prefer to be hands-off, but some will be hands-on.

Passive Investor

You are passive, or hands-off, if you don't want to worry about choosing and trading the individual funds yourself. You just want to contribute your money and forget about it. You don’t need to stress yourself out over constant decision making.

If this is you, then you may want to go with a robo-advisor. Or you may just want to pick a couple of mutual funds and then let them be.

Active Investor

You are an active, or hands-on, investor if you like to be in control of your investments. You like to trade stocks and funds yourself and be actively involved in managing your money. You don’t want a robot to manage your money because you have a certain level of expertise you want to take advantage of.

3. Choose a Brokerage and Open Your Account

A brokerage is a place where you can make and manage your investments. Here is my short list of best online brokerages for each type of investor. You can also check out this list in more detail if you like. All of these brokerages are great options for your IRA, but some may be slightly better for you depending on your preferences.

Great for All Investors

These three brokerages are great choices for both passive and active investors. They are big players and have been around a long time, but for good reason. They offer pretty much anything you could need for your investment account.

Fidelity

• $0 Account minimum.
• $0 fees on ETFs, stocks, and many mutual funds.
• Some mutual funds with zero expense ratio.
• Calculators and tools to help you plan for retirement.

TD Ameritrade

• $0 Account minimum.
• $0 fees on ETFs, stocks, and many mutual funds.
• Retirement calculator and IRA selection tool.
• Great education resources and investment selections.

Charles Schwab

• $0 Account minimum.
• $0 fees on ETFs, stocks, and many mutual funds.
• Long-standing reputation of excellence since 1971.
• Tools and learning resources like other firms.
• Great customer service.

Vanguard

• $0 Account minimum. $1,000 fund minimum.
• $0 fees on ETFs, stocks, and many mutual funds.
• Great for investing in mutual funds, and also for active trading.

Great for Active Investors

AllyInvest

• $0 Account minimum.
• $0 fee for ETFs and stocks. $9.95 per trade of mutual fund
• Great for options trading. $0.50 per options contract.

Great for Passive Investors

Betterment

• $0 Account minimum.
• 0.25% account management fee.
• Robo-advisor to make your investment decisions for you.
• Great for hands-off investors looking to try a robo-advisor.

4. Fund Your Account and Begin Investing

Now that you’ve opened your account, it’s time to get started. You begin by transferring funds into your new account. Perhaps you are rolling over a previous employer 401(k) into your new IRA. Or perhaps you are looking to contribute money from your checking or savings account, in which case you’ll need to set up a transfer from your bank. The online brokerage you choose will guide you through the steps of how to do this.

Once you have money, you can choose your investments. If you opted for a robo-advisor, you don’t really need to do anything - your investments will be chosen for you after you answer some questions about your goals and preferences. If you are not using a robo-advisor, you will need to make your fund selections. Perhaps you just choose a couple mutual funds and stay hands-off. Or perhaps you choose a diverse set of stocks, funds, or options and begin actively managing your account. That’s ultimately up to you.