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How to Open a Roth IRA

Veneta Lusk is a family finance expert and journalist. After becoming debt free, she made it her mission to empower people to get smart about their finances. Her writing and financial expertise have been featured in MSN Money, Debt.com, Yahoo! Finance, Go Banking Rates and The Penny Hoarder. She holds a degree in journalism from the University of North Carolina - Chapel Hill.

If you’re new to investing, a Roth IRA is one the easiest, smartest ways to save for retirement due to its tax advantages, which are similar to traditional IRAs.

You fund a Roth IRA with after-tax money (money you’ve already paid taxes on). This means you don’t pay taxes on whatever you take out of the account at retirement - including your investment growth!

Are Roth IRAs difficult to open? Not at all. Opening a Roth IRA is as simple as opening a standard checking out. Here's how to do it.

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Step 1: Determine Your Eligibility

Most people are eligible to open and deposit funds into a Roth IRA, but not everyone. There are a few factors that determine whether you can add money to a Roth IRA and how much.

  • How much money you make.

  • Whether you file single or jointly.

  • Whether you've added money to other IRA accounts.

Unfortunately, you can’t deposit an unlimited amount of cash in your untaxed Roth IRA. Each year has a maximum contribution limit that applies to all of your IRA accounts (like a traditional IRA, SEP IRA, etc.). Congress can adjust the tax code to change those restrictions at any time, so it's important to check each year before making your contribution.

To find out whether you can contribute to a Roth IRA and how much, see the IRS' contributions table.

Step 2. Choose Where to Open a Roth IRA

Nearly every commercial bank and investment platform offers Roth IRAs. Even though you can open a Roth IRA anywhere, don’t open an account with the first bank or brokerage you came across. Here are some factors to consider.

  • The cost to open the account, if any.

  • The cost to buy and sell securities.

  • Minimums to purchase funds, if any.

  • Whether they offer investments that meet your financial needs and goals.

  • The type and quality of their customer service.

  • The reputation of the bank or brokerage.

Step 3: Open the Account

Your next step is to formally open the Roth IRA. This is a straightforward task. The bank or brokerage will walk you through the steps. You can typically sign up online, but you may have to speak to someone.

Here’s what you’ll need for the account application.

  • Photo identification (like your driver’s license).

  • Your personal information and social security number.

  • Your employer’s name and address.

  • Your bank’s account number and routing number. They need this to transfer money from your personal account to your Roth IRA.

  • The name, address, and social security number of your plan beneficiary. This is the person who will receive your money when you die.

Furthermore, the bank or brokerage will ask you to complete IRS form 5305-R. This form documents the creation of a Roth IRA for the IRS. It names the bank/brokerage as the trustee of the account. The bank/brokerage will file the form with the IRS, but you should keep a copy for yourself.

The IRS does not require a minimum contribution to open a Roth IRA. However, you should know that most funds you purchase with your Roth IRA money have minimum purchases. Typically, they require you to invest at least $1,000. Some require $3,000, $10,000, or even more but some investment providers offer no account minimum to start investing.

Step 4: Purchase Investments

A Roth IRA is not an investment itself. It’s a vehicle to purchase investments. So once you have money in your account, it’s time to use that money to purchase some securities.

This is the fundamental purpose of a Roth IRA. If you don’t buy securities, you might as well keep that money in a standard savings account or savings investment account.

Your bank or brokerage will take custody of the money while it’s invested, but you still get to make decisions about what you buy and sell. This practice is called asset allocation.

Since your Roth IRA is full of after-tax money, you can withdraw from it at any time without paying taxes on your contributions, but you may have to pay taxes on your earnings (the interest gained from the investments) if you withdraw them before age 59½. That said, don't plan on withdrawing from your IRA. Leave it for retirement.

When it comes to investing in securities, you can take one of three approaches:

Hire a financial adviser to tell you what to buy

A financial adviser will suggest securities to buy. They will also help you rebalance your portfolio every year. Using an adviser is an easy method, but it comes with additional fees to compensate the adviser.

Buy a target-date or life-cycle fund

These kinds of funds are off-the-shelf portfolios designed for specific purposes. Some are made for rapid growth (with comparable risk), while others are designed to be conservative and safer.

By purchasing a fund, you technically make many purchases all at once. You own a share in whatever stocks, bonds, and other securities the fund owns.

Choose a fund that matches your financial and lifestyle priorities. They will automatically adjust over time depending on their purpose. These are designed to serve as your entire investment portfolio, so it’s best to only purchase one.

Design your own portfolio by picking from thousands of options

This is the trickiest way to invest your Roth IRA account, but it gives you the most control. You can purchase any securities you like, in any amount, whenever you want.

Generally speaking, it’s best to diversify your portfolio by buying an assorted mix of index funds, ETFs, and individual stocks and bonds. It’s also smart to keep a small portion of your account in cash in a money-market fund. Buy funds with an expense ratio of less than 0.5% (this is a fee for the fund on top of the brokerage fee).

Most importantly, purchase investments that you’re comfortable holding for a long period of time. You can lose a lot of money by trying to react to the daily ups and downs of the market.

Step 5: Establish a Contribution Schedule

How often will you deposit funds into your Roth IRA? When will you do it? At the beginning of the year? At the end? Sometime throughout?

It's important to establish a contribution schedule so you can budget properly throughout the year. If you don't create a schedule, there's a chance you’ll neglect to make your full contributions on time.

Since Roth IRAs are funded with after-tax money, there is no tax advantage to waiting until the end of the year to make your contribution. It's smarter, therefore, to make little contributions throughout the year from each paycheck.

Your financial institution can set up an automatic transfer at whatever interval you choose. You can even have your employer deduct the money directly from your paycheck so you never see it.

If you choose not to automatically transfer your contribution, at least make a note on your calendar each week or month so you know to move money into your Roth IRA. You’ll miss out on valuable investment income if you fail to contribute enough each year.

Be mindful about not over-contributing. If you contribute too much to your IRA and fail to fix the mistake in time, you could be subject to penalty that equals 6% of the over-contribution.

Step 6: Check Your Account, But Not Too Often

It's important to check on your Roth IRA account regularly, just like any other investment vehicle. Use these checks to benchmark the accounts performance and make any necessary adjustments.

Consider rebalancing your portfolio each year. Rebalancing is a process of adjusting your portfolio over time so it matches your current financial priorities.

For instance, as you get older and less willing to risk your money, you’ll probably want safer investments to protect your nest egg. This is why older people typically have bond-heavy investment portfolios. They’re generally safer than stocks, but pay less.

Younger people, however, typically invest in stock-heavy portfolios. These carry more risk than bonds, but provide the greatest opportunity for gain. As the years go by, they slowly sell off a percentage of the stocks in their portfolio in order to buy more bonds.

As we mentioned earlier, you can purchase a target-date fund that rebalances itself every year, or use a financial adviser who balances the account for you. But it’s still a good idea to check your account at least yearly.

That said, don’t check your account too much. There’s no need to check it every day or every week, otherwise you might stress yourself out over small fluctuations. Leave your money in for the long term, even if you have a bad year.

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Last Updated April 29, 2019

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