How To Start a Roth (Or Traditional) IRA

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How to Open a Roth IRA

Opening a Roth IRA doesn’t take a bunch of time or paperwork. It’s just as simple as opening a checking account or contacting a financial advisor. Many banks offer Roth IRAs through an online application. You could also open a brokerage account with an investment firm (online or in person). A brokerage account is an investment account you can open directly through a bank or brokerage firm that lets you buy and sell all kinds of different investments.

Here are the seven steps to open a Roth IRA.

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How much should I contribute to my Roth IRA?

When deciding how much money to deposit into your Roth IRA, you are limited to a certain amount each year.

Roth IRAs have the same contribution limits as traditional IRAs, which is the below for 2021:

  • Those under age 50: Total contribution limit to both Roth and traditional IRAs of up to $6,000
  • Those 50 or older: Total contribution limit to both Roth and traditional IRAs of up to $7,000

4. Choose investments within your Roth IRA

So, once you’ve opened your account, your next step is to choose what to invest in. Remember: Your Roth IRA is not an investment in itself—it only holds your investments and protects them from income taxes. You can put all kinds of different investments into your Roth IRA. Choosing your investments is by far the most difficult step in starting a Roth IRA because you’ve got so many options.

We recommend a mix of mutual fundsbecause they allow you to spread your investments across a lot of companies, which lowers your risk while allowing your money to grow. That’s called diversification. If you put all your eggs in one basket (single stocks or trendy investments like cryptocurrency), at some point, you’re going to end up with a mess on your hands.

Here are some other benefits of mutual funds:

  • Mutual funds allow you to use the power of the stock market’s long history of growth without taking on the risk of single stock investing. The stock market historically has an annual average rate of return between 10–12%.2
  • Mutual funds are managed by teams of investing professionals who make sure the mutual fund performs at the highest level possible. They live and breathe this stuff!
  • If you decide to work with an investing professional to open your Roth IRA and choose your mutual funds, the up-front commissions pay for your pro’s time and expert advice—not just at the time you open your account but for as long as you invest in your Roth IRA.

3. Provide paperwork

After you’ve chosen a provider, it’s time to actually set up and open your account. This typically requires a little paperwork, but many times, it can be done online. You can also open your account in person with a broker or banker.

The exact paperwork you’ll need will vary by provider and choice of funding, but here’s a quick glimpse of what you’ll typically be asked for when setting up your account:

  • A form of government-issued ID (driver’s license, passport, etc.)
  • Personal information, including your name, phone number, address, date of birth, and Social Security number
  • Your preferred contribution method
  • Information regarding your rollover account (if you want to fund the account with money from a different IRA, 401(k), or another retirement account)
  • Banking information (if you want to fund the account with electronic transfer) 

You’ll also be asked to provide information on your beneficiaries, or the people who will inherit your IRA if you die.

“The IRA beneficiary form will require the IRA owner to indicate a ‘primary’ and ‘contingent’ beneficiary to their IRA in the case of death,” Bergman says. “The ‘primary’ beneficiary is the first party or parties that will receive the IRA upon the IRA owner’s death, whereas a ‘contingent’ beneficiary or beneficiaries would only receive the IRA assets if all the primary beneficiaries are no longer alive.”

Learn more about IRAs

If you’re not sure whether you want a Traditional IRA or Roth IRA, we can help you compare. And for a general look at where you are with retirement, try out our Retirement Tools & Calculators.

When should I contribute to an IRA?

The earlier the better. With investing, time is your greatest asset. That means the sooner you start saving the longer it can grow. If you invest $10,000 and generate the average 7 percent, inflation-adjusted market return, it would be worth $19,000 after 10 years, $54,000 in 25 years, $149,000 in 40 years. Keep in mind the market may return more, or even yield negative returns, in a given year. But over long periods of time, as you can see, time in the market has a pretty big impact on growth.

Again, if you haven’t started saving for retirement don’t worry. It’s never too late to start.

Get that match. If you have a 401(k), you can still contribute the maximum allowed to an IRA, Roth IRA (within income restrictions) or combination of both. Here’s the thing, some employers offer matching contributions in their 401(k) plans. If your employer matches contributions, dollar-for-dollar, up to 6 percent of your salary, make sure you’re contributing at least 6 percent from each paycheck first. It’s free money, so don’t leave that on the table!

Once you’ve at least hit your match, you can keep funneling up to $19,000 annually into a 401(k) per current IRS rules, or you can divert funds above and beyond your employer match into your Roth IRA or traditional IRA – whichever works best for your plan. And if you’re at a point where you’ve maxed out your 401(k), an IRA is a great way to capitalize on additional tax-advantaged retirement savings, depending on your income and tax filing status.

Special Changes in 2020

In 2020, the coronavirus stimulus bill (called the Coronavirus Aid, Relief, and Economic Security (CARES) Act) allowed those affected by the coronavirus pandemic a hardship distribution of up to $100,000 without the 10% early distribution penalty that those younger than 59½ normally owe.

Account owners also either had three years to pay the tax owed on withdrawals, instead of owing all of it in 2020—extending that period to 2022—or could repay the withdrawal and avoid owing any tax, even if the amount exceeded the annual contribution limit for that type of retirement account.

How old do you have to be to open a Roth IRA?

There is no age limit with Roth IRAs. You simply must be working and making less than a specific amount of money ($125,000 as a single person or less than $198,000 if you are married and filing jointly in 2022). You can open a custodial IRA for a minor child.

Common questions

When can I access my account?

We’ll send you your account number as soon as your application is completed and approved. You can use your account number to log in and manage your account. 

What are the tax benefits?

With this account, your contributions aren’t tax-deductible – but your earnings grow tax-free and withdrawals can be made tax-free after five years, provided you are age 59½. 

You may be eligible for tax-free withdrawals before age 59½:

  • In case of death or disability.
  • To pay up to $10,000 towards the purchase of a first home.
  • To pay up to $5,000 towards birth or adoption expenses.

While there are no current-year tax benefits, you can contribute to a Roth IRA whatever your age, and you won’t need to take Required Minimum Distributions based on your age.

What are the benefits of a Schwab Roth IRA?

When you open a Roth IRA with Schwab, you get:

  • Investment help and guidance.
  • Retirement planning tools and resources. 
  • 24/7 service and support.
What kinds of investment choices do I have?

Choose from stocks, bonds, ETFs, mutual funds, CDs, and more. Schwab also offers professional portfolio management solutions that can make investing even easier. As a Schwab client, you can speak with a Schwab investment professional who can help you decide which investments are right for you. Just give us a call at 866-855-5635. We’re here and happy to help.

How much can I contribute each year?

You can contribute $6,000 for the tax year 2021 and $6,000 for the tax year 2022 ($7,000 for tax year 2021 and $7,000 for year 2022 if you are at least age 50) or up to 100% of earned income, whichever is less. Income limits apply

What are the eligibility requirements to open a Roth IRA?

There are income limitations to open a Roth IRA account. If you file as a single person and your Modified Adjusted Gross income (MAGI) is above $140,000 for tax year 2021 and $144,000 for tax year 2022 or if you file jointly and you have a combined MAGI above $208,000 for tax year 2021 and $214,000 for tax year 2022, you may not be eligible to start a Roth IRA. See the Roth IRA contribution limits for more information.

Roth or Traditional IRA—what’s the difference?

A key consideration is whether it makes more financial sense to take advantage of immediate tax benefits or enjoy tax-free withdrawals in retirement. With a Traditional IRA, you may get immediate tax benefits, but you’ll have to pay ordinary income tax on your contributions and earnings when you take money out in retirement. With a Roth IRA, there are no immediate tax benefits, but contributions and earnings grow tax-free. All withdrawals can be taken out tax-free and penalty-free providing you’re 59½ or older and you have met the minimum account holding period (currently five years).

Compare a Roth vs. Traditional IRA

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How to Start Investing in an IRA

2. Fund your account

Now it’s time to put the minimum amount in to fund your brand new account. As previously mentioned, different brokerages have different minimum requirements, so 

3. Select your investment strategy

Your next step is building a system that will allow you to seamlessly build wealth over time. This means figuring out how much you can afford to invest in an IRA each month, but it also means choosing investments that will exist within your IRA.

Remember: Your IRA is nothing more than a retirement vehicle you can use to save and invest for the future. Once you open an IRA, you still have to choose the investments that do the work inside your account.

If you find you are able to deduct contributions to a traditional IRA because your employer doesn’t offer a retirement plan, you should strive to contribute as much as you can each month up to the $500 monthly (and $6,000 annual) limit. That way, you’re building up retirement funds in a hurry while maximizing tax advantages. If you opt for a Roth IRA instead, you won’t get any tax advantages now, but you will later on since you won’t have to pay income taxes on distributions once you reach retirement age. Either way, the ultimate goal is striving to invest as much as you can each month up to account limits, and without harming your other financial goals. 

In terms of selecting your portfolio, this component of your system depends a lot on which investment platform (brokerage firm) you choose to go with. Some firms like M1 Finance let you set up “pies” of investments that are based on fractional shares. With M1 Finance, you can build your own “pie” from more than 6,000 available stocks and funds, but you can also choose from “Expert Pies” that have been put together by in-house investment professionals.

That’s just one way this can work, but there

That’s just one way this can work, but there are plenty of other ways to set up a portfolio depending on the firm you choose. For example, let’s imagine you decide to open an IRA with Betterment.

Betterment is a robo-advisor that helps you formulate an investment plan based on your age, your investing goals, and your risk tolerance. As a result, opening an IRA with Betterment is a breeze. You’ll start by answering some basic questions about yourself, including your age, your income, and when you plan to retire. From there, Betterment will suggest a specific investment plan that is formulated to help you achieve your goals.

If you’re a knowledgeable investor who wants

If you’re a knowledgeable investor who wants to select the stocks, bonds, ETFs, and other investments that live within your IRA, that’s perfectly okay, too. Just remember that some brokerage firms will help create an investing plan for you based on how much you can invest and your long-term goals.

4. Make it automatic

To help in your effort to contribute consistently, and to remove some of the pressure, consider making your investments automatic with the click of a button. Many of the top brokerage firms let you set up automatic investments through their mobile apps or online platforms, including Betterment’s example below.

5. Check in regularly and stay on track

5. Check in regularly and stay on track

Part of the fun of putting away money for your future is watching it grow. Keep an eye on your portfolio to make sure you’re contributing the way you want to. It can be tempting during tighter financial times to stop contributing, but you can always reduce your contribution amount depending on your circumstances and then change it back later. Don’t worry about small fluctuations and seek help from an advisor if necessary. 

What is the five-year rule for Roth IRAs?

The Roth IRA five-year rule states that you cannot withdraw earnings tax free until at least five years since you first contributed to a Roth IRA. This rule applies to everyone who contributes to a Roth IRA, whether they’re 59½ or 105 years old.

Minimum Deposit Requirements for a Roth IRA

The IRS has no minimum deposit requirements. You can put as little money as you want into a Roth IRA with many brokerages. Each brokerage firm has its own minimum deposit requirements. 

Generally, when you have a higher minimum deposit requirement, you also get access to more personalized services like guidance from professional advisors.

Basic Level 

Many investment companies like Fidelity and Charles Schwab will allow you to open a Roth IRA with no minimum investment requirement. You’ll manage the investments on your own. These brokerages often provide online planning tools or education materials, but not personalized advice.

Some Professional Advising 

Some brokerages offer additional services, but require a higher minimum deposit. For example, Merrill’s Guided Investing requires a $1,000 account minimum and charges a 0.45% annual fee. With this account, you can access an investment advisory platform aligned to your goals.

The Fidelity Go Roth IRA plan has no minimum deposit requirement. But you’ll pay an advisory fee for accounts with more than $10,000 for Fidelity professionals to choose and manage your investments according to your goals. 

Advanced Personal Planning and Advice 

You can often find more customized investing advice with accounts with higher minimum deposits. If you’ve been saving through your Roth IRA for years, you may have enough money to meet the deposit requirement for these services, which can range from about $20,000 to $25,000. 

You’ll typically face an advisory fee with these accounts, which is an annual fee that is a percentage of your invested assets. For example, Merrill advisory fee for an advisor with its Guided Investing Account is 0.85%, while Fidelity charges 0.5% per year for Fidelity Personalized Planning & Advice Roth IRA.

1. Decide how you want to invest

Once you’ve confirmed you’re eligible for a Roth IRA, you’ll need to consider what investing strategy you’ll want to take. Do you want to be a hands-on investor, choosing your investments and managing your portfolio directly? Or would you rather take a hands-off approach and let the professionals do the work for you?

If you’re new to investing or not too keen on research, a robo-advisor can be a smart move. These are online, technology-based solutions that build portfolios based on your risk tolerance, goals, and other data. They come with several perks, like automatic portfolio rebalancing and lower fees.

“​​Robo-advisor funds are a great way for beginner Roth IRA investors to get access to advisor-managed funds at a low cost,” says Adam Bergman, founder and CEO of IRA Financial Group

If you’re interested in a more active approach, a brokerage might be your best choice. With a brokerage, you can build and manage your entire portfolio yourself, usually using an online dashboard or app. It requires more research and investing know-how than other options, and in some cases, may come with higher fees, too. The benefit is there are often more investments to choose from, plus access to real-life investing professionals if needed.

Tip

Consolidate your savings

Consider consolidating your financial assets in order to simplify your finances and get a better view of your overall financial picture.

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