Money expert Clark Howard thinks Roth IRAs are just about the best tool around when it comes to saving for retirement. So learning how to open a Roth IRA is something you should consider.
In this article, I’ll go through the steps you need to take to open a Roth IRA and give you tips to make sure you’re maximizing your retirement investment strategy.
Table of Contents
- Why Open a Roth IRA?
- Step 1: Determine Your Roth IRA Eligibility
- Step 2: Choose a Company To Oversee Your Roth IRA
- Step 3: Open Your Roth IRA Account Online
- Step 4: Fund Your Roth IRA and Set a Contribution Schedule
- Step 5: Invest the Money in Your Roth IRA Account
- Frequently Asked Questions About Opening a Roth IRA
Why Open a Roth IRA?
A Roth IRA is a great supplement to your employer-sponsored retirement plan. And if you don’t have an employer-sponsored 401(k), a Roth IRA can be an even more crucial part of your retirement portfolio.
Roth IRAs allow you to contribute post-tax dollars, which then grow tax-free. That means your contributions won’t lower your federal tax burden. But you won’t have to pay a cent in taxes when you withdraw money from your Roth IRA once you’ve retired.
You can actually withdraw any of the money that you’ve put into your Roth IRA (your contributions) at any time — with no penalty. But you’ll need to wait until age 59½ to take out the money that your investments have earned to avoid paying a tax penalty.
“A Roth IRA is the most efficient place for you to have money grow for your retirement because the money in it grows tax-free and is spent tax-free,” money expert Clark Howard says.
Step 1: Determine Your Roth IRA Eligibility
|Filing Status||Modified Adjusted|
Gross Income (MAGI)
|Single*||< $125,000||$6,000 ($7,000 for 50+)|
|Single*||Between $125,000 and $139,999||Reduced amount|
|Single*||≥ $140,000||$0 (ineligible)|
|Married Filing Separately^||< $10,000||Reduced amount|
|Married Filing Separately^||≥ $10,000||$0 (ineligible)|
|Married Filing Jointly#||< $198,000||$6,000 ($7,000 for 50+)|
|Married Filing Jointly#||Between $198,000 and $207,999||Reduced amount|
|Married Filing Jointly#||≥ $208,000||$0 (ineligible)|
*Or filing separately and you didn’t live with your spouse at any time during the last year.
^Or filing separately and you lived with your spouse at any time last year.
#Or you’re a qualifying widow(er)
If you make a certain amount of money, you won’t be able to contribute directly to a Roth IRA.
To be more precise, the limits are related to your total income which can include things such as income from a rental property or from stock you sold.
The limit is based on your modified adjusted gross income (MAGI). It’s not talked about as much, but the IRS also expects you to have “earned income” in order to contribute to a Roth IRA. That’s income from a paying job either working for yourself or for someone else.
If you’re eligible to contribute to a Roth IRA, great! You can unlock one of the most powerful retirement investing tools.
If you’re not eligible, you’re not totally cut off from Roth IRAs, which I’ll discuss later in this article.
More good news: If you’re a married couple filing jointly and you’re eligible to contribute to a Roth IRA, you can contribute up to a combined $12,000 per year: $6,000 in each person’s account. Plus, one spouse can fund some or all of the other spouse’s contribution limit. And if you’re over 50, you can contribute even more.
Step 2: Choose a Company To Oversee Your Roth IRA
When you open a Roth IRA, you can manage your own investment portfolio or via a robo-advisor.
There are many reasons to handle your own investments. Clark’s favorite reason is to avoid fees. You may still need to pay taxes on your gains and pay expense ratios on any mutual funds or exchange-traded funds (ETFs) in which you invest. But there are plenty of places to open a Roth IRA that won’t charge annual management fees and won’t charge you for trading stocks and ETFs.
If you’ve listened to or read Clark, you already know he’s a huge fan of Fidelity, Schwab and Vanguard for almost all things investing.
If you’re going to manage your own portfolio, you can pick one of those three options and rest easy at night.
|Provider||Minimum Target Date Fund Investment||Typical Expense Ratio||Get Started|
|Vanguard||$1,000||0.12% to 0.15%||Click here|
|Fidelity||$0||0.12% to 0.75%||Click here|
Opening a Roth IRA With a Robo-Advisor
A robo-advisor is a great solution for someone who would rather outsource their investing instead of managing their own portfolio. Several of the best robo-advisors charge 0.25% or less per year in management fees.
Robo-advisors automatically invest your money in well-diversified pre-built portfolios that are appropriate for your timeline and risk tolerance.
I’ve also written about the best robo-advisors. Clark.com’s top recommendations are Betterment and Wealthfront.
Step 3: Open Your Roth IRA Account Online
You can open an account in person at some brokerages. Fidelity and Schwab are examples.
But it’s easy to open a Roth IRA online as well. You’ll probably be able to fill out the entire application in just a few minutes.
Some of the things you may want to have handy include:
- Photo ID
- Social Security number
- Employer’s name and address
- Account and routing numbers for the bank account you want to use to fund your Roth IRA
- Beneficiary’s address and Social Security number
That last bullet point may be easy to overlook, but it’s important. Otherwise, your account can go into probate when you die.
If you’re planning to roll over a 401(k) into a Roth IRA, there are additional steps to consider. Want to understand the mechanics of a 401(k) rollover? We’ve got you covered.
Step 4: Fund Your Roth IRA and Set a Contribution Schedule
As you saw in the table above, most people younger than 50 can contribute up to $6,000 to their Roth IRA each year. That number increases to $7,000 for those 50 and older.
You’re allowed to contribute your maximum for the year as soon as you open your Roth IRA. Or you can set an automated contribution schedule (say, $500 per month for 12 months).
Keep in mind that, for any individual year, you can contribute up until that year’s official IRS tax filing deadline.
Step 5: Invest the Money in Your Roth IRA Account
If you’re learning how to open an IRA, this final step is important, but it’s one a lot of people overlook.
Just because you’ve moved your money into an IRA account does not mean it’s automatically invested. You have to make that decision proactively or the funds will sit in a cash settlement account.
Clark’s favorite investment strategy is to put all your money into a target date fund. The best things about that option are that it’s very inexpensive through the right company (0.15% or less) and it will automatically rebalance your portfolio appropriately the closer you get to retirement. Just pick the year closest to when you think you’ll retire and continue contributing to that fund.
If that seems too boring, Clark’s second recommendation is to split your money into three low-cost index funds: a total stock market, an international and a bond fund.
Frequently Asked Questions About Opening a Roth IRA
How Can I Get a Roth IRA if I Make Too Much Money To Qualify?
If you make too much money (or technically, if your MAGI is too high) to contribute directly to a Roth IRA, there’s still an IRS-sanctioned way to open one.
Often called a “backdoor Roth IRA,” this is a legal way to allow your retirement investments to grow tax-free even if you’re generating a lot of income.
There are multiple ways to back into a Roth IRA if your income disqualifies you from making direct contributions. But they usually involve transferring your money from a traditional IRA or 401(k) into a Roth IRA. That generates an immediate tax bill. (Remember, Roth IRAs involve post-tax dollars.)
Clark says if you’re decades from retirement and have the cash on hand to pay the taxes, using a backdoor Roth IRA could be a great idea. If you’re considering this option, it’s a good idea to consult with a tax professional or a fiduciary financial advisor from the Garrett Planning Network.
Should I Roll Over My Old 401(k) Into a Roth IRA?
You should strongly consider rolling over your old 401(k) into a Roth IRA if:
- You want more investment options than the 401(k) plan provides.
- The Roth IRA provider you’re considering will save you considerable annual fees and/or expense ratios.
- You’d like to avoid the hassle of monitoring multiple accounts or tracking down the person who oversees your old plan in the future.
Click here to read about the five things you can do with an old 401(k).
What’s the Minimum Contribution Required To Open a Roth IRA?
The IRS does not impose a minimum contribution requirement. However, the company where you open your account may have one.
When Can I Withdraw My Roth IRA Money Without a Tax Penalty?
As Clark says, Roth IRAs are excellent because they let your money grow tax-free. You fund your account with post-tax dollars, but you’ll never have to pay taxes on that money again, assuming you follow some rules.
Here’s a simplified version of those rules:
- You can take out the money you put in at any time. For example, if you contribute $10,000 and your investments grow to $20,000, you’re allowed to take out your $10,000 penalty-free whenever you want.
- If you’re at least 59½ and your Roth IRA account is at least five years old, you can withdraw earnings penalty-free as well. In our example, if you meet these criteria, you’d be able to take out the entire $20,000 without paying a cent in taxes.
- If you’re younger than 59½ or your account is less than five years old, you can withdraw earnings without penalty under certain circumstances such as to buy your first home.
Contributing to a Roth IRA can be a wonderful step toward securing your financial future in retirement.
Procrastination and intimidation are common enemies even if you’re financially prepared and capable of opening a Roth IRA. Hopefully this article helped you understand how to open a Roth IRA so those things won’t be obstacles for you.