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How to Open a Roth IRA

Roth individual retirement accounts (IRAs) are in the same family of traditional, SEP, and SIMPLE IRAs, but offer different tax benefits. Contributions to Roth IRAs are taxed, so that your savings can grow tax-free, similar to Roth 401(k)s. The contributions inside your Roth IRA can be diversified across a wide variety of investment options, most commonly include mutual funds, ETFs, stocks and bonds. 

In this article, we’re going to take a look at some simple steps to opening a Roth IRA account, to help get you started with your retirement savings. Before we dive into the steps to create one, we’re going to briefly run through how a Roth IRA works.

How do Roth IRAs Work?

Roth IRAs are retirement savings plans built through after-tax contributions, and are grown and withdrawn in retirement tax-free. Roth IRAs do not have RMDs (requirement minimum distributions) either. The IRS has set up rules around withdrawing from retirement plans, the most common amongst them is that you must be over 59 ½.

Simply put, the IRS stings you for not following their rules – early withdrawals are hit with an additional 10% penalty tax.

There is a $6,000 contribution limit for those that qualify (table discussed below). Ages 50+ qualify for catch-up contributions of an additional $1,000 (or $7,000 annually).

Lastly, individuals can diversify their portfolio however they please across their brokerage’s investment offerings – stocks, bonds, ETFs, Mutual Funds, and in other cases, complete portfolios (check out Ally Invest’s options).

Steps to Opening a Roth IRA

The most difficult part of opening a Roth IRA is making sure you qualify for its benefits – otherwise, everything else comes down to your personal preference. Let’s start!

Step 1: How to Qualify for a Roth IRA:

Retirement plans are regulated by the IRS (Internal Revenue Services), which is responsible for enforcing federal tax laws. With Roth IRAs, the IRS establishes contributions limits – it would seem a bit unfair if every tax bracket could grow their savings tax-free, right?

For example, for a single head of house to qualify for the benefits of a Roth IRA, the saver’s modified adjusted gross income (MAGI) must fall below $124,000 (2020). 

To see a complete list of filing statuses, see below:

Filing Status2020 MAGIMax. Annual Contribution 
Single/head of household<$124,000$6,000 ($7,000 if age 50+)
$124,000 – $138,999Reduced amount
>$139,000Not eligible
Married filing jointly<$196,000$6,000 ($7,000 if age 50+)
$196,000 – $205,999Reduced amount
>$206,000Not eligible
Married filing separately (and lived with spouse in the year)<$10,000Reduced amount
>$10,000Not eligible

Step 2: Where to Open a Roth IRA

Regardless of where you do open your Roth IRA, you are going to have to provide personal information. Thanks to technology, you can usually complete all steps off of your mobile device or personal computer.

Information requested includes:

  • Name and address 
  • Bank account information (for funding the Roth IRA)
  • Social Security Number
  • Photo identification (e.g. drivers license, passport, etc.)

Following a successful account opening, you are generally prompted to begin setting up the beneficiaries to your retirement account. You do not always have to complete this right away, but it is good practice to complete it as soon as possible. 

Roth IRAs are not tied to your employer, therefore you have the liberty to choose where you open your retirement plan. If you are comfortable and enjoy choosing your own investments, open a brokerage account, and start a Roth IRA with them.

Some of the top brokerage choices could include:

For investors looking for a more personal touch to their portfolio, and/or would like to consider receiving advice in other areas of their financial life (e.g. insurance, budgeting, savings), try meeting with a financial advisor!

Robo-advisory applications, such as Betterment or M1 Finance, have stormed the market lately. For the most part, they are free to open, as well as charge lower management fees compared to human advisors.

This forced a bit of competition with powerhouse brokerages, such as Fidelity or TD Ameritrade, so they have begun rolling out similar products – Fidelity Go, or TD Ameritrade Essential Portfolios. 

Check out some our robo advisor information below:

PartnerFeesAccount MinimumBest For
Betterment0.25%$0Intro – Experienced Investors
Personal Capital.89%$100K+$1MM
SoFi0%0$Intro – Experienced Investors

Step 3: Begin Investing

Once you’ve opened the account, congrats, you can begin saving for your retirement! If you choose to manage your own investments, and are completely lost, it isn’t common to start with a robo-advisor, or consult with a financial advisor for some help. 

Remember that these funds are considered illiquid, and should be considered for the long run. Maybe save the risky, breaking tech stock for your brokerage account, and consider dividend yielding stocks, or mutual funds – just be sure to compare fees.

Quick Tip: Depending on what month you are starting your Roth IRA, you may get ahead, and contribute to last year’s amount as well. 2019 and 2020’s limit is $6,000 (with $1,000 catch up contributions available to 50+). 

Where To Go From Here – Roth IRA vs Traditional IRA

Roth IRAs and Traditional IRAs are commonly mistaken for each other, so let’s make the differences clear. Other than both retirement plans having IRA in their name, and their maximum contribution is $6,000 ($7,000 for ages 50+), they are very different. 

Read More: Roth IRA vs A Traditional IRA, Which Is Best For You?

Traditional IRAs offer benefits to this year’s tax bill, contributions can qualify to be deducted. Meaning, they could lower your current year’s tax bracket. Early withdrawals of traditional IRAs are subject to the 10% penalty and income taxes. Required minimum distributions (RMDs) must begin at 70 ½. 

On the other hand, Roth IRA contributions are after-tax, meaning investments can grow, and be withdrawn in retirement tax-free. Unlike traditional IRAs, there are no RMDs with Roth IRAs, or early withdrawal penalties on contributions. Consequently, early withdrawal of earnings in your Roth IRA are subject to a 10% penalty and income tax.