5 Steps to Open a Roth IRA

If you think taxes aren't likely to be lower by the time you retire, you'll want to learn how to open a Roth IRA. A Roth Individual Retirement Account (IRA) is a retirement account that lets you make tax-free withdrawals. There's no such thing as a free lunch, of course; your contributions are taxed before they're deposited into an IRA instead of when they're withdrawn.

Definition

What is a Roth IRA?

A Roth IRA is simply an individual retirement account (IRA) that taxes your contributions when you deposit them rather than when you withdraw them. The main advantage of a Roth is fairly obvious; if taxes will be higher when you retire, you'll get a break. The main disadvantage is that there's no up-front tax break. If you only have a limited amount to invest, your after-tax deposits may be smaller, so your investments may not accumulate as rapidly as they would with a traditional IRA.

Step-by-step instructions

Steps to open a Roth IRA

To open a Roth IRA, follow these steps:

1. Determine your eligibility

The first step to opening a Roth IRA is finding out if you're eligible. The criteria for Roth IRA eligibility are fairly straightforward and based on modified adjusted gross income (MAGI). Generally speaking, you can open a Roth IRA and contribute the maximum annual amount if you're single and your annual income is less than $138,000 (2023) or $146,000 (2024), or if you're married and filing jointly, your combined income is less than $218,000 (2023) or $230,000 (2024).

2. Decide where to open your account

Assuming you're eligible, your next step should be determining where to open your account. If you're a hands-on investor, you can open a Roth at an online broker and choose your own retirement planning adventure from funds or other investments that they offer. If you're a "set-it-and-forget-it" type of investor, your best bet is a robo-advisor, an automated service that will build and keep a diversified portfolio that requires little of your time.

Either way, you should be sure to check on fees and commissions. A robo-advisor will generally offer services for less than a standard brokerage.

3. Gather necessary documents

Opening a Roth IRA requires little in the way of paperwork. You'll need some form of government-issued identification, your Social Security number, and information about where the money is coming from, such as bank routing and accounting numbers.

4. Pick your investments

One of the biggest benefits of a Roth IRA is the ability to choose your own investments. You can select individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), or any combination (as long as your provider offers them). As with any other investment decision, your choices will depend on your risk tolerance.

5. Set up a contribution schedule

Finally, you'll want to consider the amounts and frequency of deposits to your account. Two disadvantages are the Roth IRA income limits and low contribution limits.

If you're filing as a single person or head of household:

• In 2023, you can contribute up to $6,500 if your income is less than $138,000.
• In 2024, the contribution limit increases to $7,000. You can contribute the full amount if your income is less than $146,000.
• If you're older than 50, you can chip in an extra $1,000 in both tax years.
• If you're earning between $138,000 and $153,000 (2023) or $146,000 to $161,000 (2024), contributions are reduced.
• If you earn more than $153,000 (2023) or $161,000 (2024), you're not eligible to directly fund a Roth IRA, although you may be able to fund one through what's known as a backdoor Roth IRA by contributing to a traditional IRA, then converting it to a Roth.

If you're married and filing jointly:

• In 2023, you can only earn $218,000 in combined income to make the full $6,500 annual contribution.
• In 2024, the income limit for the full contribution is $230,000.
• If you're older than 50, the limit increases by $1,000 in both tax years.
• Contributions are reduced for households that make between $218,000 and $228,000 (2023), and $230,000 and $240,000 (2024).
• Couples who make more than $228,000 (2023) or $240,000 (2024) can't directly contribute to a Roth IRA.

What to do after it's set up

What to do after you've opened your account

Opening a Roth IRA involves relatively little maintenance for most investors. You'll want to review monthly statements to ensure there aren't any surprises, and you may want to rebalance your portfolio periodically.

Consider how your IRA meshes with any other retirement plan. For example, if you also have a conservative employer-sponsored 401(k) plan, you might use an IRA for a high-risk, high-reward opportunity such as emerging markets or growth stocks.

You should also be sure to name a beneficiary so your account will pass directly to the person you name and avoid probate. Check with your financial advisor to get an idea of the rules that govern IRA distributions to your beneficiaries.

Important considerations

Important things to consider when opening a Roth IRA

Besides the opportunity to increase your investment without taxes, Roth IRAs offer a few other benefits. Penalty-free withdrawals can start at age 59 ½, as long as you've had the account for five years. Taking money from a Roth IRA also won't affect your retirement income for tax purposes.

Anyone who inherits your Roth IRA won't have to pay federal income tax on withdrawals (again, if it's been open for five years). You can contribute to both a Roth IRA and another retirement account, like a 401(k) if you meet contribution and income limits. And perhaps most importantly, you can choose investments ranging from mutual funds and exchange-traded funds (ETFs) to individual stocks and bonds.

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Bottom line

The best time to start a Roth IRA may have been yesterday, but today is a good choice, too, now that you know how a Roth IRA works. As with any other investment decision, make sure your savings won't cut into your ability to pay down high-interest credit cards and loans, as well as pay for basic necessities.

If you're concerned that taxes may increase and you want the ability to make your own investment decisions, a Roth IRA can be a key part of your retirement nest egg.