How To Start A Roth IRA: A Beginner’s Guide

Key Takeaways


When you’re young and just starting out, retirement can feel like a distant concept. Ironically, your youth is when saving up for retirement is more important than it’ll ever be.

That’s because money takes time to grow. By starting today, you’ll have decades to let your savings compound before you hit retirement. This article will show you exactly how to start a Roth IRA, one of the best ways to save for retirement.

What Is A Roth IRA?

A Roth IRA is a type of individual retirement account (IRA). What sets a Roth IRA apart from a traditional IRA is that it allows you to make tax-free withdrawals once you retire. Roth IRA accounts are available through various banks and brokerage firms. Many of these financial institutions will let you set up your account entirely online, making it accessible to anyone.

Why Should You Start A Roth IRA?

You should start a Roth IRA because it’s a great way to establish your retirement investment strategy. If you already have a retirement savings account through your employer, such as a 401(k), a Roth IRA can be a great way to supplement your savings.
Roth IRA accounts are funded with after-tax dollars, and your contributions won’t be tax-deductible.

This might not sound attractive to you right off the bat. A traditional IRA allows you to invest funds on a pre-tax basis, and you qualify for a tax deduction to boot. So, why start a Roth IRA? The appeal of this type of account is you are bearing your tax burden upfront so that down the line, your income won’t be taxed when you make withdrawals in retirement. You’ll be thanking your younger self when you’re retired and you’re receiving your tax-free income.

What Do You Need To Start A Roth IRA?

To start a Roth IRA, you’ll want to gather basic identification and financial documents you’d need when opening any type of account:

  • Driver’s license or other acceptable form of government-issued identification

  • Social security number

  • Bank routing account number

  • Personal checking and savings account numbers

  • Employer name and address

  • Beneficiary information


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How old do you have to be to start a roth ira

How To Start A Roth IRA In 5 Steps

Learning how to start a Roth IRA is easy. In fact, it’s so easy that we broke it down into 5 simple steps for you to follow:

  1. Find Out If You Are Eligible

  2. Decide Where To Open Your Accounts

  3. Complete The Paperwork

  4. Choose Your Investments

  5. Make Scheduled Contributions

1. Find Out If You Are Eligible

First, find out if you’re eligible. You must have earned income for the year, or else you won’t be able to contribute to your account. Roth IRAs are associated with income limits and contribution maximums, so be sure to know these as well.

  • Tax Year 2019

  • For the 2019 tax year, the income limit for individuals is between $122,000 and $137,000. This range increases to between $193,000 and $203,000 for couples.

  • Tax Year 2020

  • For the 2020 tax year, the income limit for individuals is between $124,000 and $139,000. For couples, the range is between $196,000 and $206,000.

The next condition to keep in mind is the contribution maximum. This is how much you are allowed to deposit into your Roth IRA in a given year. Currently, the maximum is $6,000. If you are over 50 years old, the maximum is increased to $7,000. If you fall somewhere in between the ranges listed above, you can still contribute, but your contribution limit is reduced. If your income is above the range, then you are not eligible to contribute at all.

Below you’ll find the contribution limits defined based on tax filing status and modified adjusted gross income for the filing years 2019 and 2020.

2019 Roth IRA Income Limits

Married Filing Jointly

Modified AGI : <$193,000

Contribution Limit: Up to the Limit

Modified AGI : > $193,000 but < $203,000

Contribution Limit: Reduced Amount

Modified AGI: ≥ $203,000

Contribution Limit: Zero

Married filing separately, but you live with your spouse

Modified AGI: <$10,000

Contribution Limit: Reduced Amount

Modified AGI: ≥$10,000

Contribution Limit: Zero

Single, head of household, or married filing separately and you do not live with your spouse

Modified AGI: <$122,000

Contribution Limit: Up to the Limit

Modified AGI : > $122,000 but < $137,000

Contribution Limit: Reduced Amount

Modified AGI: ≥ $137,000

Contribution Limit: Zero


2020 Roth IRA Income Limits

Married Filing Jointly

Modified AGI : <$196,000

Contribution Limit: Up to the Limit

Modified AGI : > $196,000 but < $206,000

Contribution Limit: Reduced Amount

Modified AGI: ≥ $206,000

Contribution Limit: Zero

Married filing separately, but you live with your spouse

Modified AGI: <$10,000

Contribution Limit: Reduced Amount

Modified AGI: ≥$10,000

Contribution Limit: Zero

Single, head of household, or married filing separately and you do not live with your spouse

Modified AGI: <$124,000

Contribution Limit: Up to the Limit

Modified AGI : > $124,000 but < $139,000

Contribution Limit: Reduced Amount

Modified AGI: ≥ $139,000

Contribution Limit: Zero

2. Decide Where To Open Your Account

Once you’ve determined your eligibility and contribution amount, you’ll need to decide where to open your Roth IRA. If you already have a traditional IRA, check whether your company can open a Roth IRA for you as well. Otherwise, virtually all investment companies offer Roth IRA accounts.

When comparing different products, there are some things to look out for. First, make sure to compare account opening and maintenance fees. Then, determine whether they offer the type of investments you’re interested in. If you plan to use your Roth IRA for frequent trading, find out how much the fees will cost you. Finally, check reviews to determine the quality of the brokerage, including the availability of customer service.

You’ll also want to ask yourself how involved you want to be in your investments. Some brokerages are more hands-on, while others are more hands-off. If you prefer to have your investment decisions made on your behalf, then robo-advisors are an easy choice.

3. Complete The Paperwork

Most banks and brokerages offer an application that is entirely online. Before you begin, prepare the items listed in the section, “What do you need to start an IRA?” The brokerage will typically lay out the steps in the application to make the process simple and easy.

When you get to the part of naming your beneficiaries, make sure to name at least one. In case anything were to happen to you, the beneficiary of your choice will gain the rights to your investment savings. Significant life events can change your desired beneficiary, so be sure to keep this information updated.

4. Choose Your Investments

The trickiest part of setting up your Roth IRA is choosing your investments. Your Roth IRA is not a savings account. It is an investment account, which means you need to decide how your savings will be invested. Investors typically choose a mix of stocks, such as ETFs and bonds. It would be wise to consult a financial advisor, who can get to know your investment goals and help guide you in the right direction. If you prefer to be hands-off and not have to make any investment decisions, a robo-advisor can do that for you.

5. Make Scheduled Contributions

Once you have opened your account, set up your contributions. By automating your contributions on a regular basis, you’ll prevent yourself from getting behind your investment schedule. Your bank can help you set up an automatic, monthly transfer from your bank account into your Roth IRA. Most investors contribute a set percentage of their monthly income, allowing their investments to increase as their careers progress.

How much to start a roth ira

How To Start A Roth IRA FAQ

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As a beginner, you’ll naturally have questions about the nuts and bolts of how a Roth IRA works. It’s also important to get informed so you know how to make your investments work to your advantage. Here are some frequently asked questions (FAQ) posed by beginners, along with the answers.

How Much Money Do You Need To Start A Roth IRA?

While brokers won’t charge you a fee to open a Roth IRA, almost all of them require a minimum investment. (As they should — with no money in your account, you’ll have nothing to grow.) The minimum contribution amount will depend on what type of investments will be associated with your account. Some mutual funds will have a minimum investment of around $1,000, while other investment types can get started with just a few dollars. Although you won’t need to pay this upfront, you should also be prepared to pay commission on any trades that are made.

Where Is The Best Place To Open A Roth IRA?

The best place to open a Roth IRA depends on a variety of factors. NerdWallet rounded up a list of the best accounts, which you’ll find below. This list was selected based on factors such as investment selection, customer support, account fees, and account minimums, to name a few.

Best For Investors Who Prefer To Be Hands-Off

  • Betterment IRA

  • SoFi Automated Investing

  • Ellevest

  • Schwab Intelligent Portfolios

  • Fidelity Go

  • Schwab Intelligent Portfolios Premium

Best For Investors Who Prefer To Be Hands-On

  • You Invest by J.P. Morgan

  • Firstrade

  • TD Ameritrade IRA

  • Ally Invest IRA

  • Merrill Edge IRA

  • Charles Schwab IRA

  • E*TRADE IRA

  • Fidelity IRA

What Types Of Investments Should Be In Your Roth IRA?

Remember: your Roth IRA account is just the holding place of your investments. The account is not an investment in itself. Rather, it indicates how the taxes on your investments will be structured.

This means that you can hold virtually any type of investment in your Roth IRA. Once you open and put money into your account, you’ll need to decide what that money should be invested in. Experts recommend a mix of mutual funds. They offer low investment minimums, are less risky than single stocks, and are managed by experts who spend their careers studying the market.

What Is A Good Age To Start A Roth IRA?

The longer you can leave your Roth IRA untouched, the more time your money will have to grow. Five years’ worth of Roth IRA investing early on in someone’s career could be turned into several hundred thousands of dollars down the line. With this in mind, starting as early as possible should be common sense. No matter your age, get started today.

Are Roth IRAs Insured?

Roth IRAs are insured, to a certain extent. The Federal Deposit Insurance Corporation (FDIC) provides coverage for up to $250,000 in any type of IRA account.

This means that if you have $300,000 total saved across your IRA accounts, $50,000 of it is uninsured.

Can You Lose Money In A Roth IRA?

Yes, you can lose money in a Roth IRA. However, these losses can be mitigated with patience and control. Your investments will fluctuate along with the market, so if the market nosedives, then so can your investments. However, market fluctuations balance out over time. Patience is the key. The surest way to take a direct hit on your Roth IRA is by making an early withdrawal. If you take money out of your Roth IRA too early, you will get taxed on that income, plus another tax penalty of 10 percent. The longer you can leave your investment untouched, the less likely you are to lose money.

Can You Transfer A 401(k) To A Roth IRA?

Yes, you can transfer a 401(k) to a Roth IRA. Let’s say you contributed income to a 401(k) account through your employer, but then you change employers. If you were to withdraw your savings, you would get heavily penalized with taxes for making an early withdrawal. Instead, protect your savings by rolling them over to a Roth IRA account. There is more to be said on this strategy, so be sure to check out our rollover IRA guide, so that you can do it the right way.

Summary

Roth IRA accounts are a fan-favorite. Investors who understand the time value of money will agree that frontloading your tax burden is well worth it. By putting your savings into a Roth IRA instead of a traditional IRA, your investments get to grow tax-free. Beginners who were wondering how to start a Roth IRA should now feel encouraged to get started as soon as possible. Opening up a Roth IRA and starting up your retirement investment savings is super simple and easy.

What do you think are the best investments to make through your Roth IRA account? Share your opinion in the comments below!

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