How to Open a Roth IRA

If you’re wondering how to open a Roth IRA and start saving today, we’ve got you covered. Below is everything you need to know about getting started.

How to Open a Roth IRA

One reason Roth IRAs are a great way to save for retirement is because of the tax advantages. While you don’t get a tax break when you contribute, you can withdraw all contributions plus interest and dividends tax-free when you retire.

If you think you will be in a higher income bracket in retirement, this can be a significant tax break. In addition, you can withdraw your contributions without penalty at any point. There are also certain rules that allow you to withdraw some funds penalty-free to pay for expenses such as higher education.

Opening a Roth IRA is easy if you follow the steps below. Here’s how to get started:

  • Check if you’re eligible to contribute to a Roth IRA
  • Choose where to open your account
  • Open your account online or send in the paperwork
  • Decide how to invest your money

Before we go over how to open a Roth IRA, let’s first talk about the reasons you may want to add this account to your retirement strategy.

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Should you open a Roth IRA?

The short answer is: It depends. There are several factors you need to consider before opening a Roth IRA. One of the most important considerations is eligibility. There are certain income limitations for using a Roth IRA to save for retirement.

If you’re not eligible because of your income, there are other ways to contribute by doing a Roth IRA conversion. However, this is a more advanced financial move, so talk to a qualified professional before doing a conversion.

If you are eligible to contribute, consider whether adding a Roth IRA to your retirement accounts makes sense. You pay taxes when you contribute to the account, so people who expect to be in a higher tax bracket in retirement can benefit from a Roth IRA. You can withdraw all contributions, interest, and dividends tax-free in retirement.

Determine if you’re eligible to contribute to a Roth IRA

Unlike traditional IRAs, not everyone is eligible to contribute to a Roth IRA. There are certain income restrictions that limit who can take advantage of this tax-saving vehicle, which we’ll describe in detail in a moment.

If you are eligible to open a Roth IRA, the next step is figuring out where to stash your cash.

Decide where to open the Roth IRA

There are several options for where to open your Roth IRA, including financial institutions, banks, credit unions, investment companies, and many more.

Here’s what you should consider when evaluating your options:

  • Fees - One of the most important considerations should be the fees that an institution charges. Excessive trading fees will eat away at your account balance and cost you in the long run. Find a brokerage that offers low fees for trades.
  • Investing options - Before you open your Roth, check if the institution you want to use has the types of funds you want to buy for your portfolio. For example, banks or credit unions may only offer high-yield savings accounts or Certificates of Deposit as an investment option. Pick a financial institution that offers a variety of options such as ETFs, target-date funds, actively managed funds, stocks, bonds, etc.
  • Customer service - If good customer service is important to you, make it one of your criteria for picking an institution for your Roth. You can gauge this by calling their number and asking several questions about the company and your options as an investor. Are you happy with the level of service you’re getting? Does the conversation make you feel confident about the institution?
  • Investing style - If you’d like to be hands-on and choose your own stocks, pick a brokerage. This option will allow you to be in the driver’s seat of your Roth IRA investments. However, if you want someone else to manage it for you, you can go with a robo-advisor. Robo-advisors are online portfolio management services that help you open a Roth IRA and diversify your investments. They charge you a small fee for helping you build and maintain a diversified portfolio.

Once you pick which type of account you want and narrow it down to your top choice, it’s time to fill out the paperwork and open your account.

Open your account and submit all paperwork

You’re ready for the next step: opening your Roth IRA account. Most brokers and robo-advisors allow you to open your account online (although you may have to mail in a component of the application to complete your account opening).

Here’s what information you will need to open a Roth IRA account:

  • A government form of photo identification such as your driver’s license
  • Your Social Security number
  • Your checking or savings account number and your bank’s routing number
  • The name and address of your employer
  • Information for your plan beneficiary such as name, date of birth and Social Security number (optional but recommended)

If you opt for a brokerage that has in-person locations, you can always go to the nearest branch to fill out your application and get help with questions.

Decide how to invest the money

Now that you’ve opened your Roth IRA and funded the account, you need to decide how to invest the money inside. This can be by far the most difficult step for those unfamiliar with investing terms.

If you opted to go with a robo-advisor service, you will need to fill out information about your risk tolerance and retirement goals to get recommendations for investing your money. If you opted for the do-it-yourself approach, you’re in charge of picking the right mix of stocks, bonds, and mutual funds.

You may be able to invest in target-date mutual funds, which rebalance assets based on your target date for retirement. This takes some guesswork out of saving for retirement and can help you avoid making snap decisions that can affect your returns.

Who Can Open a Roth IRA?

Your eligibility to contribute to a Roth IRA is income-dependent. People who file jointly and make more than $203,000 a year or single filers making more than $137,000 a year may not be eligible (2019 figures). The Internal Revenue Service website has a calculator to help you determine your eligibility.

No matter your age, you can continue contributing to a Roth IRA as long as you’re employed and earning income from a paycheck or contract work. Investment income doesn’t count. The minimum you will need to contribute depends on the rules of the institution where you have your account.

The maximum contribution limit for 2019 is $6,000 with a $1,000 extra for the 50+ group for $7,000 total. Contributions must be made by the tax filing deadline.

Check the IRS website for more information on eligibility as it relates to your modified adjusted gross income or MAGI for short. The contribution limits for IRAs also change regularly so consult with the IRS for the latest numbers.

The Best Place to Open a Roth IRA Account

Most online brokers, banks, credit unions, and robo-advisors offer Roth IRAs. While banks and credit unions most often have physical locations, brokers and robo-advisors require doing everything online.

The pros of going with a bank or a credit union are that you can walk into a branch and talk with a real person. However, some cons include limited investing options since most offer conservative savings vehicles such as CDs rather than stocks and mutual funds.

The pros of going with an online broker or a robo-advisor are that you can complete the entire process from the comfort of your home. And you get a much wider selection of investment options for your Roth IRA portfolio.

Robo-advisors are online brokers that aim to simplify your investment decisions. Many people get stuck on how to invest the money inside of their Roth IRA. Going with robo-advisors takes the guesswork out since they use computer algorithms to offer investment plans tailored to your goals and time horizon.

The best place to open a Roth IRA account is the one that hits all the major requirements on your list and offers the types of investments and service that simplify your life.

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