How to open a Roth IRA in 5 steps

Roth IRAs are one of the best ways to save for retirement. Although there is no up-front tax benefit, there is a tax-free income in retirement, even on earnings that have been accumulated over the years. There are also no required minimum distributions for Roth IRAs during your lifetime. That means you can expect the money to keep growing until you need it, or even leave the income tax-free to your heirs.

The Roth is especially beneficial for young people, who have plenty of time to grow their money before retirement. But there are no age limits for creating a Roth IRA.

One more advantage: it’s easy to open a Roth IRA, online or in person. Here we tell you how:

Make sure you are eligible

Most people are eligible to contribute to a Roth IRA, as long as they have earned income during the year. But there are income limits, based on your modified adjusted gross income (MAGI).

  • For tax year 2019, an individual’s ability to contribute to a Roth IRA begins to phase out at $122,000 and disappears entirely at $137,000. For couples, the contribution is reduced to $193,000 and disappears entirely at $203,000.
  • For tax year 2020, the phase-out range for an individual is $124,000 to $139,000. For couples, it’s $196,000 to $206,000.

Keep reading: What are the rules for withdrawing your 401(k)?

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

  • For 2019 and 2020, you can contribute $6,000 to an IRA, plus another $1,000 if you’re 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 2019 they are:

If your marital status is… And your modified adjusted gross income (MAGI) is… you can contribute
Married Filing Jointly <$193,000 To the limit
> $193,000 but

< $203,000

a reduced amount
≥ $203,000 Zero
Married Filing Separately, But Living With Spouse <$10,000 a reduced amount
≥$10,000 Zero
Single, head of household, or married filing separately and not living with spouse <$122,000 To the limit
> $122,000 but

< $137,000

a reduced amount
≥$137,000 Zero

The figures for the year 2020 are:

If your marital status is… And your modified adjusted gross income (MAGI) is… you can contribute
Married Filing Jointly <$196,000 To the limit
> $196,000 but

< $206,000

a small amount
≥ $206,000 Zero
Married Filing Separately, But Living With Spouse <$10,000 a small amount
≥$10,000 Zero
Single, head of household, or married filing separately and not living with spouse <$124,000 To the limit
> $124,000 but

< $139,000

a reduced amount
≥$139,000 Zero

Decide where to open a Roth IRA

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

Answer these questions as you decide where to open your account:

  • Is there a charge to open or maintain it?
  • Does the company offer customer service online or by phone?
  • Does the company offer the types of investments you’re looking for, whether it’s 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 frequently buy and sell on your account.

There are many online brokers that offer Roth IRAs, and some are better than others. We’ve put together a list of the best brokers for Roth IRAs to make the process easy.

The financial institution with which you open your account is called a “custodial” because it is responsible for the custody of your money.

Fill out papers or documents

Most banks and brokerages have a website for Roth IRA accounts that you can visit to start the process. It is possible to complete the entire application online, although you can also speak to someone from customer service if you have any questions.

Requirements to open a Roth IRA account:

  • A driver’s license or other form of photo identification.
  • Your social security number.
  • Your bank details, checking or savings account number so that they can transfer money directly to your new account.
  • The name and address of your employer.
  • The name, address, and social security number of your plan’s beneficiary (the person who will receive the money in the event of your death).

It is very important to name one or more beneficiaries, in this way the account can pass to another person without having to submit it to the legal succession process. Remember to keep your beneficiary designation up to date, especially after events such as marriage, divorce, or death of a beneficiary.

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

Make your investment choices

The financial institution will help you open the account, but you will have to decide how you want to invest the money that goes to your Roth. This can be the hardest part of starting a Roth.

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

  • Design your own portfolio choosing among all the options available in most financial institutions.
  • Buy a definite date or life fund. It’s like a standard 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.

Some considerations about each of these options:

Design your own portfolio:

If you’re building your own investment portfolio within your Roth IRA, it’s important to choose investments based on your comfort level and your time frame until retirement.

Many people invest more in bonds as they get older because bonds are more stable than stocks. On the other hand, stocks have historically produced higher returns, so there is a tradeoff.

The new rules of thumb suggest keeping a sizeable portion of stocks in your portfolio, even as you age. This is because people are living longer, often have less retirement savings, and may face rising medical costs.

Many experts recommend buying two to six mutual funds or exchange-traded funds (ETFs) -some made up of stocks and others of bonds- and keep a small percentage of the account in cash or similar, such as money market funds.

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

Buy a definite date or life fund:

Consisting of a mix of stocks and bonds, these funds are designed to automatically adjust over time, moving to safer investment options as you approach retirement age.

Some examples of well-known fund families are Fidelity’s Freedom Funds and Vanguard’s Target Retirement Funds.

If you buy a life fund, remember that it is designed to be your entire retirement portfolio. It is better to buy only one.

Also keep in mind that due to the type of management of these funds, their commissions may be higher than those of other investments.

Consult an advisor:

Some people prefer to hire an advisor, a financial specialist, to help them choose investments for their Roth IRAs. Others rely on free or paid guidance from the company that is managing their account.

Either way, be sure to ask the questions you need to know what you’re getting and if it’s appropriate for your goals.

Set your contribution schedule

If your bank allows it, you can set up monthly transfers from your bank account to your Roth IRA. You can also choose to make an annual contribution, as long as you continue to meet the income requirements.

You can contribute to your Roth IRA until the following year’s tax return filing date, usually April 15.

Remember that 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 do it, the better, so that the money starts to produce.

IMPORTANT: Check your Roth IRA account at least once a year to see if an adjustment is needed.

After you have opened your account

Make sure you regularly read your account statements and take the time to carefully reassess your investment options, at least once a year. You may wish to buy and sell investments at this time to rebalance your account.

COver time, as the markets rise and fall, the value of your investments will change. For example, let’s say you started the year with a portfolio where you had 30% bond funds and 70% stock funds. You may find that at the end of the year, the portfolio has changed. If the shares have decreased in value, it can now be 40% bonds and 60% shares.

In that case, you may want to sell some shares in the bond funds and use the proceeds to buy more shares in the stock funds.

The more investments you own, the more complicated the rebalancing will be. This generally becomes more important the closer you are to retirement, and you should balance to increase your percentage of less volatile fixed income assets, such as bonds.

If you have a life fund, you don’t need to worry about rebalancing, but it’s still wise to review your account.

Many financial experts say that everyone should have a Roth IRA if eligible. It’s never too early (or unlike traditional IRAs, too late) to open a Roth IRA, and it’s easy to get started.

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