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How to Open a Roth IRA

If you’re looking to accrue more for your retirement savings, a Roth IRA might just be the place to put it. Roth IRAs allow the money you contribute to the account to grow tax-free, since you will have already paid taxes on the money you put into it. These accounts also offers tons of flexibility in how you manage your money. In fact, they provide a wide range of investment opportunities, and they’re available to be opened at many different institutions. If you have questions about how to manage your retirement funds, consider speaking with a local financial advisor.

Decide If a Roth IRA Is Right for You

A Roth IRA is a type of individual retirement account (IRA) that you fund with after-tax dollars. Because you’ve already paid income taxes on your contributions, there is no immediate tax benefit. However, this allows you to also make tax-free withdrawals, plus your money grows in the account tax-free. These accounts are the opposite of tax-deferred accounts like 401(k)s and traditional IRAs, which offer the upfront tax benefit of reducing your current taxable income.

Note that your income can limit your eligibility for a Roth IRA. For 2021 and 2022, single filers and heads of household can make up to $129,000 before their contributions are reduced — by $144,000, the allowable contributions are reduced to zero. For 2021 and 2022, those who are married filing jointly can make up to $204,000 before that occurs, though — until $214,000 when the allowable contributions are reduced to zero. For those married filing separately, their income limit depends on whether or not they lived with their spouse during the year. If they did, the income limit is $10,000. But if they didn’t, they can make up to $129,000 before having to reduce their contributions — with $144,000 standing as the outside limit.

All IRAs also come with yearly contribution limits. For 2021 and 2022, if you’re under the age of 50, you can contribute up to $6,000 per year. For those 50 or older, the IRS allows for an extra $1,000 in annual “catch-up” contributions, with a limit of $7,000.

Unlike other retirement accounts, you can withdraw from your Roth IRA at any time with no penalty. You can only withdraw what you contributed, though, rather than anything the account has earned. That makes a Roth IRA well-suited for non-retirement funds, too. For example, you might use a Roth IRA to save for a big expense like college or the down payment on a house.

Pick Where to Open Your Roth IRA

How to Open a Roth IRA

After you decide to go with a Roth IRA, the next step is deciding where to open your account. Many financial institutions offer Roth IRAs, so you have a ton of options, from small credit unions to international brokerages. The institution you choose will depend on personal preference, but there are certain factors that you’ll want to keep an eye out for.

First off, you’ll want to look for a provider with low account and investment fees. Some plans may charge an annual fee just for having an account, while others can have hidden fees for certain transactions. However, there are a ton of options that won’t cost you much.

You should also look for Roth IRA providers that offer a large selection of low-cost funds. In particular, you may want to look for mutual funds and exchange-traded funds (ETFs), as they offer an easy, hands-off way to invest. If you’re looking to be riskier, many institutions will also offer stocks and cryptocurrencies for investment.

An important consideration when looking at Roth IRA providers is how hands-on you want to be with your investments. If you want to go the “set-it-and-forget-it route,” you could opt to open an account with a robo-advisor. Robo-advisors invest your money in a diversified portfolio based on your goals and risk tolerance. They set your investments and continue to manage and rebalance your accounts over time, leaving you to participate as much as you’d like. The trade-off is that you have to pay an annual fee for a robo-advisor’s services, though they are usually fairly cheap.

Another option is to open your Roth IRA with a financial advisor who can handle your account personally. Advisors also typically specialize in retirement and financial planning, allowing them to build a portfolio that aligns with all of your short- and long-term goals. To find a financial advisor near you, try using SmartAsset’s free matching tool.

Open and Fund Your Roth IRA

Once you’ve picked an IRA provider, you can go ahead and open your account. Nowadays, creating an account is often as simple as going to a company’s website and following the prompts. Some smaller institutions may not have this offering, but you can just as easily visit a local branch to open your account.

Whether online or in person, you will need to provide personal information to open an account. This includes your marital status, Social Security number, employment information and bank or retirement account information.

Once your account is open, you can begin funding it, which is just as simple. Providing your bank account information allows for easy transfer between accounts. As an ACH payment, it could take a few days for funds to transfer. Keep in mind that some small or local institutions do require you to transfer money in person or over the phone.

Choose the Investments in Your Roth IRA

How to Open a Roth IRA

At this point in the Roth IRA process, you’ve created an account and put some money into it. Now you need to decide what investment options you want in your Roth IRA. An easy way to get started investing is a target-date fund. This is a mutual fund that you pick based on your intended retirement date. A fund manager fills the fund with a mix of stocks, bonds and other assets, with the mix becoming more conservative as you get closer to your target date.

Many people who want to manage their account safely will build their portfolio out of index funds and ETFs. Index funds mirror an overall market index (like the S&P 500) and offer instant diversification. ETFs are traded like individual stocks, but they consist of multiple stocks. You can also minimize your risk by investing in bonds or bond funds.

If you’re willing to take on more risk, you can instead invest in stocks. Some stocks are safer than others, but stocks in general tend to be riskier and more volatile. Choosing individual stocks can be difficult for many people, even though they can provide a high return.

Regardless of the exact assets that invest in, your goal should be to create a diversified portfolio. This means that your retirement funds should be spread across many different types of investments and markets. This prevents your entire portfolio from failing should one industry or market fail.

Generally speaking, younger investors are able to take on riskier investments. That way even if you lose money temporarily or if the market drops, you have time to rebuild before you retire. On the other hand, you’ll likely want to play it safe the closer you get to retirement. You don’t want to save for decades and then lose it all a year before you retire due to risky practices.

Contribute Money to Your Roth IRA Over Time

How frequently you contribute to your Roth IRA will partially depend on where you open your account. Some institutions require a minimum monthly contribution, but luckily you can usually automate those payments. Even if you don’t have to contribute each month, it’s a good idea to contribute as regularly as you can.

As mentioned above, Roth IRAs have a a maximum annual contribution of $6,000 for investors under 50 and $7,000 for those over 50. Remember that this maximum applies to all IRAs, so it applies to both your traditional IRA and Roth IRA if you have one of each.

Make sure to also contribute money under the correct tax year. The deadline to contribute to a Roth IRA is usually April 15 of the next year, which is tax day. So if you want to contribute to your account this year, you still have time to contribute after the year technically ends. Just make sure to specify that your contribution is part of the previous tax year.

Bottom Line

Despite being a crucial part of life, many Americans don’t have enough saved for retirement. Getting started sooner than later, by researching IRAs and the like, is certainly a step in the right direction. As you move forward, make sure to keep your goals in mind and look for Roth IRA providers that align with your goals. Avoid fees as much as possible to ensure you maximize your savings. Beyond that, make sure to contribute as much to your account as you possibly can so you don’t run into troubles at the worst time.

Tips for Your Retirement Savings

  • Financial advisors specialize in helping clients invest for retirement, which makes them great partners for anyone looking to boost their retirement savings. Luckily, finding a local financial advisor doesn’t have to be hard. SmartAsset’s free tool can match you with up to three advisors in your area. Get started now.
  • Roth IRAs earn the most if you start young and add to them consistently for decades. But if you already have a retirement account, you can convert your money to a Roth IRA.
  • If you’re managing your own investments, it’s important to have a succinct plan in place for where your assets will go. Try using SmartAsset’s asset allocation calculator to figure out a plan that fits your risk profile.

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Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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