How to Start a Roth IRA

A Roth IRA can be a great way to 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 It’s only when you make a withdrawal that you will pay income taxes on the amount withdrawn.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 been contributing to your Roth account for at least five years.  

How to open a Roth IRA 

If you’re wondering how to set up a Roth IRA, the good news is: You can do so in five easy steps. Here is how to open a Roth IRA:  

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 modified adjusted gross income for the year. Here are the eligibility requirements for single filers in 2023:  

• A single filer who earns less than $138,000 during the year can contribute up to the full contribution limit ($6,500 if under 50 years old or $7,500 if 50 or older).  

• A single filer who makes between $138,000 - $153,000 can contribute a reduced amount depending on their income.  

• A single filer who earns more than $153,000 during the year cannot contribute to a Roth IRA at all.  

For a married couple filing jointly, the limits in 2023 are:  

• A married couple filing jointly with an income of less than $218,000 can contribute up to the full contribution limit ($6,500 if under 50 years old or $7,500 if 50 or older).  

• A married couple filing jointly with an income of between $218,000 and $228,000 can contribute a reduced amount depending on overall income.  

• A married couple filing jointly with an income over $228,000 cannot directly contribute to a Roth IRA this year.  

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.  

You also may be able to open a custodial Roth IRA on behalf of your child. If your child earns an income, you could open an account in their name and contribute up to the amount that the child earned that year (up to the $6,500 contribution limit). Imagine how much that money could grow from age 16 to age 60!  

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. (It’s not to be confused with a custodian that watches over a minor’s custodial accounts.) 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. 

When selecting a custodian, you’ll want to first get a good understanding of:  

• Any maintenance fees or transaction fees for trades 

• Funds offered by your custodian 

• The reputation and stability of the custodian 

• Service processes like online account management and customer support 

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 fill out a tax form (5305-R) and 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. In determining how much you'll invest, you’ll need to think about:  

1. Your eligibility. Using your income and filing status, determine how much money you are eligible to contribute. (See above.) 
2. Your budget. 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. 
3. Your timeline. 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.  

As just one example, let’s say that you are eligible to contribute the full $6,500 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 $125 each week ($6,500/52 weeks = $125). If you want to invest on a monthly schedule, you’d invest $541.67 each month ($6,500/12 months = $541.67). 

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 include: 

• Stocks: equity in publicly-traded companies 
• Bonds: loans to a governmental organization or company that repays the loan to you (with interest)  
• Mutual funds: a collection of assets traded once per day at a single price 
• ETFs: a collection of securities traded throughout market hours 
• Target-date funds: funds designed to grown money over a given period of time 
• 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. A traditional IRA can offer many benefits too, and it can be advantageous to have a mix of both. And depending on a variety of factors, you’ll likely want to invest in a variety of types of financial options when saving for retirement.  

If you’re unsure about whether you should be including a Roth IRA in your retirement savings plan, a Northwestern Mutual financial advisor can help you evaluate your options and 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.