5 Steps to Opening a Roth IRA

It's easy to get started

Roth IRAs are one of the best ways to save for retirement. Though there’s no upfront tax benefit, you get tax-free income in retirement—even on the earnings that have accumulated over the years. There are also no required minimum distributions (RMDs) for Roth IRAs during your lifetime. That means you can let the money keep growing until you need it, or even leave tax-free income to your beneficiaries.

The Roth is especially beneficial for younger people who typically have lower income tax rates than they are likely to have when they withdraw Roth IRA funds. They also have decades for their money to compound before retirement, allowing them to take greater advantage of compound interest. And there are no age limits for creating a Roth IRA, so one can be created for a child of any age.

One more perk: It’s really easy to open a Roth IRA. Here’s how.

Key Takeaways

  • Opening a Roth IRA is easy, and most investment companies offer them.
  • Roth IRAs provide no upfront tax benefit but do provide tax-free income in retirement.
  • Your contributions must come from earned income in order to qualify.
  • Roth IRAs come with no required minimum distributions during your lifetime.
  • Be sure to review the financial institution where you'll open your account as well as your investment choices.

1. Make Sure You’re Eligible

Most people are eligible to contribute to a Roth IRA as long as they have earned income for the year. If you're considering contributing to one, keep in mind that there are income limits based on your modified adjusted gross income (MAGI):

  • For the 2021 tax year: An individual's ability to contribute to a Roth IRA starts phasing out at $125,000 and disappears altogether at $140,000. For couples, the contribution is reduced starting at $198,000 and phased out altogether at $208,000.
  • For the 2022 tax year: The phaseout range for an individual is $129,000 to $144,000. For couples, it is $204,000 to $214,000.

There are also limits to the maximum amount you can invest in a Roth IRA each year:

  • For 2021 and 2022: You can contribute $6,000 to an IRA, plus another $1,000 if you are age 50 or older. If you have more than one IRA, such as a traditional tax-deferred account and a Roth account, the combined limit stays the same.
Roth IRA Income Limits for 2021 and 2022
If your filing status is... And your 2021 modified AGI is... And your 2022 modified AGI is... You can contribute
Married filing jointly <$198,000 <$204,000 Up to the limit
  ≥$198,000 but < $208,000 ≥$204,000 but < $214,000 A reduced amount
  ≥ $208,000 ≥ $214,000 Zero
Married filing separately but you live with your spouse <$10,000 <$10,000 A reduced amount
  ≥$10,000 ≥$10,000 Zero
Single, head of household, or married filing separately and you did not live with your spouse <$125,000 <$129,000 Up to the limit
  ≥ $125,000 but < $140,000 ≥$129,000 but < $144,000 A reduced amount
  ≥$140,000 ≥$144,000 Zero

If you need to reduce your contribution, you can use our Roth IRA calculator to determine the correct amount.

You can't contribute more than your earned income for the year. For example, if you only earn $5,000, that's the most you can contribute. Investment income from securities, a rental property, or other assets is considered unearned income, so it doesn't count.

2. Decide Where to Open Your Roth IRA Account

Almost all investment companies offer Roth IRA accounts. If you have an existing traditional IRA, the same company can probably open a Roth IRA for you.

Ask these questions as you decide where to open the account:

  • Is there a fee to open or maintain it?
  • Does the company provide customer service online or by telephone?
  • Does the company offer the types of investments you're looking for, whether that means exchange-traded funds (ETFs), target-date funds, actively managed funds, or stocks and bonds?
  • How much does it cost to trade? This is especially important if you plan to buy and sell frequently in your account.

The financial institution you open the account with is called a custodian because it takes custody of your money.

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3. Fill out the Paperwork

Most banks and brokerages have webpages for Roth IRAs that you can visit to begin the process. You may be able to complete the entire application online, or you can speak to someone in customer service if you have questions.

You’ll need the following:

  • A driver’s license or another form of photo identification
  • Your Social Security number (SSN)
  • Your bank’s routing number and your checking or savings account number so that you can transfer money directly to your new account
  • The name and address of your employer
  • The name, address, and SSN of your plan beneficiary (the person who will get the money in the account if you die)

Naming one or more beneficiaries is very important. It allows the account to pass to someone else without having to go through probate. Remember to keep your beneficiary designation up to date, especially after events like marriage, divorce, or the death of a beneficiary.

As part of the application, you will have to fill out a 5305-R form for the Internal Revenue Service (IRS).

4. Choose Investments

The financial firm will help you open the account, but you’ll need to decide how you want to invest the money that goes into your Roth. This can be the most difficult part of starting a Roth IRA.

There are three basic approaches to choosing investments for your Roth IRA.

  • Design your own portfolio by picking a selection from the many options available at most financial institutions.
  • Buy a target-date fund or life-cycle fund. It’s like an off-the-shelf portfolio designed by an investment company for someone your age.
  • Consult a financial advisor, either one who works with that financial institution or an independent one of your choice.

Below are some considerations about each of these choices.

Design your own portfolio

If you’re going to design your own investment portfolio within your Roth IRA, it’s important to pick investments based on your comfort level and your time horizon to retirement. Many people put more of their investments into bonds as they get older because bonds are more stable than stocks. On the other hand, stocks historically have produced higher returns over the long term, so there’s a tradeoff.

New rules of thumb suggest keeping a sizable portion of stocks in your portfolio even as you get older. That’s because people are living longer, often have lower retirement savings, and may face increased medical expenses.

Many experts recommend buying two to six mutual funds or ETFs—some made up of stocks and others of bonds—and keeping a small percentage of your account in cash or cash equivalents, such as money market funds.

Look for funds that have expense ratios of less than 0.5%. That fee is in addition to the fees you may pay the bank or brokerage for the account itself.

Buy a target-date or life-cycle fund

These funds, which consist of a mix of stocks and bonds, are designed to automatically adjust over time, moving to safer investment choices as you approach retirement age. Some examples from well-known fund families are Fidelity Freedom Funds and Vanguard Target Retirement Funds.

If you buy a target-date fund, remember that it’s designed to be your entire retirement portfolio. It’s best to buy just one. Also, note that because of the management involved in these funds, their fees can be higher than those of other investments.

Consult an advisor

Some people prefer to hire an advisor, such as a fee-only financial planner, to help them pick investments for their Roth IRA accounts. Others rely on free or paid guidance from the company that is the custodian of their account. Either way, be sure to ask questions so that you know what you're getting and whether it's appropriate for your goals.

5. Set Up a Contribution Schedule

If your bank allows you to, you can set up monthly transfers from your bank account to your Roth IRA. Alternatively, you can decide to make an annual contribution as long as you still meet the income requirements. You can contribute to your Roth IRA as late as the tax-filing date for the following year, typically April 15.

Remember, contributions to Roth IRAs are made with after-tax money, so there’s no tax advantage to waiting until the last minute to make your contribution. In fact, the sooner you contribute, the sooner that money will go to work for you.

If you make too much to contribute directly to a Roth IRA, a so-called backdoor Roth IRA conversion might be an option for you.

After You've Opened Your Account

Be sure to read your regular account statements and take time to carefully re-evaluate your investment choices at least once a year. You may want to buy and sell investments at that point to rebalance your account.

As markets rise and fall, the value of your investments will change over time. For example, let’s say you started the year with a portfolio that was 30% in bond funds and 70% in stock funds. You may find that at the end of a year, the portfolio has shifted. If stocks have declined in value, it may now be 40% bonds and 60% stocks. In this case, you may want to sell some bond fund shares and use the proceeds to buy more stock fund shares.

The more investments you own, the more complicated rebalancing will be. This typically becomes more important the closer you are to retirement when you rebalance to increase the percentage of less-volatile fixed-income assets such as bonds. If you have a target-date fund, you don’t need to worry about rebalancing, but it’s still smart to check on your account.

Who Can Open a Roth IRA?

As long as you have earned income, you can open and contribute to a Roth IRA. The exception is if your earned income for the year exceeds the limits set by the IRS.

Where Can I Open a Roth IRA?

Almost all brokerage firms, banks, and investment companies offer Roth IRAs. There are many online brokerages offering Roth IRA accounts, and some are better than others. We put together a list of the best Roth IRA brokers to make the process easier.

Can I Open a Roth IRA for My Child?

You can open a Roth IRA for your child. In order to do so, you’ll need to set it up as a custodial account, which is an account controlled by someone over 18 for a minor.

How Much Money Do I Need to Open a Roth IRA?

The minimum amount to open a Roth IRA varies depending on the financial institution. But many, particularly online brokers, don’t require a minimum amount of money to open an account.

The Bottom Line

Individuals who anticipate that they will be in a higher tax bracket when they’re older may benefit from a Roth IRA. This individual retirement account (IRA) allows you to withdraw money tax-free as long as certain conditions are met. Roth IRAs are similar to traditional IRAs but are taxed differently. The accounts are funded with after-tax dollars, and so do not offer the upfront tax break of a 401(k) or traditional IRA. On the other hand, with a Roth IRA, you can withdraw your contributions (but not earnings) tax- and penalty-free at any time.

Article Sources
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  1. Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make For 2021."

  2. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), etc.," Page 4.

  3. Internal Revenue Service. "Retirement Topics - Catch-Up Contributions."

  4. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), etc.," Page 3.

  5. Internal Revenue Service. "Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)." Pages 6-7.

  6. Internal Revenue Service. "Roth Individual Retirement Trust Account," Page 2.

  7. Internal Revenue Service. "Traditional and Roth IRAs."

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