How to Start a Roth IRA

A Roth IRA can be a great way to invest and save for retirement, but if you’re new to this type of investment account, it’s easy to feel a bit overwhelmed. That’s okay.

Below, we’ll help you understand how a Roth IRA works, answer some of the most common questions about Roth IRAs and walk through the steps to open one of your own.

What is a Roth IRA?

A Roth IRA is an individual retirement account that, unlike a 401(k), isn’t sponsored by an employer. Anybody with earned income can open and contribute a Roth IRA, as long as they do not earn too much money in a given year (which we’ll get to below).

While Roth IRAs are very similar to traditional IRAs, there are some important differences. One of the most important is how taxes are treated.

With a traditional IRA, contributions lower your taxable income for the year in which you make them. Those contributions then grow tax-deferred. It’s only when you make a withdrawal that you will pay income taxes on the amount withdrawn.

When you make contributions to a Roth IRA, you don’t reduce your taxable income in the year that you make your contributions. Instead, you’ll pay income taxes as you normally do. But your money will grow tax free and when you make a qualified withdrawal from your Roth IRA in retirement, it’s typically completely tax free, assuming your withdrawals are done at age 59½ or older, and you’ve owned your Roth account for at least five years.

How to open a Roth IRA

These are the steps you can follow to open a Roth IRA account for yourself.

1. Determine whether you are eligible for a Roth IRA.

Before opening a Roth IRA, it's important to understand whether or not you are eligible to contribute to one based on your income for the year.

As of 2023, a single filer who earns less than $138,000 during the year can contribute up to the full limit ($6,500 if under 50 years old or $7,500 if 50 or older). A single filer who earns more than $153,000 during the year cannot contribute to a Roth IRA at all. Single filers who fall somewhere in between these numbers can contribute a reduced amount depending on their income. For couples who are married and filing jointly, those limits are $218,000 and $228,000, respectively.

If you contribute to a Roth IRA when you're not eligible, or you contribute more than you are allowed, the IRS will charge you a penalty when you file your taxes for the year — up to 6 percent of your ineligible contributions.

If you earn too much to contribute to a Roth IRA, you can still contribute to a traditional IRA. It is important to note, however, if you are covered by a retirement plan at work, your ability to deduct contributions to an IRA are subject to income limitations.

2. Choose a custodian for your Roth IRA.

A custodian is just a fancy way of referring to the financial institution that holds your investments. In other words, it's where you'll keep your IRA. When it comes to choosing a custodian, you have a number of options. You may be able to work directly with the company, or you may want to work with a financial advisor who can get to know you and your goals and help to select investments based on that understanding.

3. Complete the paperwork for your Roth IRA.

The next step is to simply complete the required online or paper forms. Some companies may even allow you to do an in-person visit if you prefer.

Generally speaking, you'll need to provide your name, date of birth, address, contact information and Social Security number to open the account. You'll also typically be asked to provide certain documents and information, including these:

• Driver's license or other government-issued ID
• Bank routing number (to fund the account)
• Employer's name and address

You'll also be asked to choose a beneficiary or beneficiaries, who will inherit your account if you die. You'll be asked to provide their names, dates of birth and Social Security numbers.

4.  Set up your contributions.

The next step in opening a Roth IRA is to set up your contributions.

First, determine how much money you are eligible to contribute based on your salary. (See above.)

Second, take a look at your budget to determine how much money you have available for investing. This can also be a good time to evaluate your spending patterns and potentially prioritize your expenses to free up more cash.

Third, determine how often you’ll invest. Most people prefer to invest on a weekly, bi-weekly or monthly schedule, which allows them to dollar-cost average over time. But you can invest on whatever schedule makes the most sense for you.

As just one example, let’s say that you are eligible to contribute the full $6,000 to your Roth IRA and you want to max out your contributions each year. If you want to invest on a weekly schedule, you’d invest about $115 each week ($6,000/52 weeks = $115). If you want to invest on a monthly schedule, you’d invest $500 each month ($6,000/12 months = $500).

If possible, consider automating your contributions. This will make it easier to stick with your long-term investment strategy, as you won’t need to make a conscious decision to invest each time.

5. Choose your investments.

Finally, if you are managing your Roth IRA on your own, you’ll be responsible for selecting your own investments. This could involve individual stocks and bonds. You could also choose to use ETFs, target-date funds, mutual funds and other options that give you a basket of investments with a single fund purchase. Generally speaking, basic investment advice applies to investing in your Roth IRA as well:

• Make sure that your investments are properly diversified.
• Consider your investment horizon in setting your asset allocation.
• Align your investment strategy with your risk tolerance to avoid panic selling.

If you’ve opened your Roth IRA through a robo-advisor, you typically won’t be able to select investments on your own. Instead, you’ll automatically be slotted into a portfolio based on how you answer certain questions. Similarly, if you are working with a financial advisor to manage your Roth IRA, that person will typically establish an asset allocation that aligns with your financial goals, based upon discussions with you.

Working a Roth IRA into your financial plan

Depending on your financial situation, a Roth IRA can be an excellent way of saving for retirement. But Roth IRAs aren’t right for everyone, and they’re not the only option available to you. Depending on a variety of factors, a different retirement account could fit you better.

If you’re unsure about whether you should be saving for retirement in a Roth IRA, a financial advisor can help you evaluate your options and can also help you think about how your retirement savings fit into your overall financial plan, which most likely includes other financial goals.

All investments carry some level of risk including the potential loss of all money invested.

This publication is not intended as legal or tax advice.  Financial Representatives do not render tax advice.  Consult with a tax professional for tax advice that is specific to your situation.