You can open a Roth IRA at a brokerage or financial institution. Learn everything you need to do to open one.
A Roth IRA is a type of retirement account where you make contributions with money that has been taxed. Once you reach 59½, you can make tax-free withdrawals.
Related: What are the different types of IRAs?
One of the main benefits of having a Roth instead of a Traditional IRA is that there aren’t required minimum distributions. That means you won’t be forced to make withdrawals, and you can withdraw from it whenever you need it.
It’s an excellent way to stash away money for retirement because your money will grow tax-free, as well. If you’re ready to open a Roth IRA, take the following steps.
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1. See if you’re eligible
Not everyone is eligible for a Roth IRA. Before you try to open one, make sure you’re eligible because it’s based on income.
The income limits are based on your modified adjusted gross income (AGI) and tax filing status. The limits are as follows:
- Married filing jointly or qualifying widow(er): $198,000.
- If the modified AGI is $208,000 or more, you can’t contribute to a Roth IRA.
- Single, head of household, or married filing separately and you didn’t live with your spouse: $125,000.
- If the modified AGI is $140,000 or more, you can’t contribute to a Roth IRA.
Keep in mind that the IRS can change the income limits. Stay up to date by checking the IRS website or ask your financial institution.
2. Decide on a financial institution or brokerage
If you’re eligible, the next step is to find a place to open your account. Most financial institutions offer Roth IRAs. If yours doesn’t, check with a brokerage or robo-advisor.
While you can open one at your bank or credit union, the following are the best places to open a Roth IRA:
When you’re comparing IRA providers, look for one that doesn’t charge fees for having an account. Since it has to do with your retirement, make sure you go through a trustworthy company.
3. Open the account online or fill out the paperwork
After you find the right provider, it’s time to open the account. Most financial institutions and brokerages allow you to open a Roth IRA online. Typically, you can get everything set up online in 15 minutes.
If you prefer to fill out paperwork, visit the provider in person, or get the paperwork online and mail it in.
When you’re opening the account, you’ll need to provide the following details:
- Your full legal name.
- Social security number.
- Date of birth.
- Government-issued identification.
- Bank account information.
- Employment information.
It’s also important to add a beneficiary. You’ll need their name, date of birth, social security number, and address. You can add one or more. This ensures that your money goes where you want it to if you were to pass away.
4. Make a contribution
While it’s not mandatory, try to contribute on day one or soon after. You can connect your bank account with your Roth IRA by providing your account number and routing number.
Once your accounts are connected, you can make a one-time contribution or put it on a schedule. Based on your budget and comfort level, you can try monthly or quarterly contributions.
The sooner you make your first contribution, the more likely you are to stick with it.
5. Create your portfolio
When you contribute, it’ll go into the Roth IRA account. Then, you’ll choose your investments and set up your portfolio.
While some providers offer IRA savings or CDs, look for other investment options. A savings account or CD isn’t going to give you significant returns in the long run.
Your portfolio can consist of stocks, mutual funds, bonds, or ETFs. There are many ways to build your portfolio, and it can change over time.
When you’re creating your portfolio, consider the amount of risk that you’re willing to take on.
You can do it yourself, work with a financial advisor, robo-advisor, or have the provider generate one automatically based on your goals.
6. Aim to max it out every year
After you’ve opened your Roth IRA and selected your investments, do your best to contribute the maximum amount each year. Create a budget and make your IRA contributions a priority.
There’s a cap on how much you can contribute, and it’s as follows:
- $6,000 if you’re under 50 years old.
- $7,000 if you’re over 50 years old.
If you make more than the limit for the full contribution and less than the maximum limit, you may be able to contribute a reduced amount. Check with the IRS or your IRA provider to stay up to date with the most recent limits.
7. Make sure you’re on track for retirement
Since you’re investing for retirement, it’s important to make sure you’re on track. Your provider may have a calculator or tool to see if you’re on track for retirement.
You may also want to consider rebalancing your portfolio, which can involve buying or selling assets.
Speak with a financial advisor, your provider, or use a tool to see your progress. You’ll also want to make changes accordingly.
Frequently asked questions
How much money do I need to start a Roth IRA?
Most Roth IRA providers don’t require an initial deposit. However, making a contribution that works with your budget is a great step towards saving for retirement.
Can you lose all of your money in a Roth IRA?
Yes, it’s possible to lose all of your money in a Roth IRA. However, it depends on how you invest it. If you invest the entire amount in one stock that crashes and never goes back up, it’s possible to lose it all. You can mitigate risk and fluctuations by diversifying your portfolio.
Do I report my Roth IRA contributions on my tax return?
No, you don’t report your Roth IRA contributions on your tax return because they’re not tax-deductible.
A Roth IRA is an excellent retirement account to have because it grows tax-free, and withdrawals aren’t taxed after you reach 59½. It’s easy and straightforward to start one. Make sure you’re eligible, find a good provider, and start building a fund for retirement.
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About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.