How To Open Your Roth IRA in 5 Easy Steps

A Step-By-Step Guide To Your Roth IRA

Retirement planning is a lot like hiking. Both take planning, both have a destination and both rely on the right tools to reach a goal. When you’re on the road to retirement, one of those tools might be a Roth IRA. Opening a Roth IRA account can be as simple as opening a bank account, but there are some things you should know to get started.

Take a look at a few key points covered in this guide on how to start a Roth IRA:

Make Sure You’re Eligible for a Roth IRA

If you want to open a Roth IRA you must meet certain eligibility requirements. The good news is, there’s no age limit to set up a Roth IRA, and you can leave your money in your account for as long as you live. With a traditional IRA, you must start withdrawing your money by the time you reach age 70 1/2. The following bullet points are eligibility requirements for a Roth IRA:

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  • You or your spouse must be employed and have income either from a salary, hourly wage or self-employment.
  • If you are unemployed, you can still qualify by gaining access to your spouse’s income as long as your spouse meets the employment requirement.
  • Your income must fall within certain ranges that are based on your Modified Adjusted Gross Income. Look at how you file taxes and what your income is under each scenario — single, married filing jointly or married filing separately.

How To Open a Roth IRA in 5 Steps

The idea of choosing the right stocks, bonds and other investment options for your retirement can be intimidating if you aren’t sure what it all means or how to proceed. But the process of opening a Roth IRA is actually pretty straightforward.

1. Choose What Type of Investor You Are

There are several types of investors, and most people shift from one type to another over time. Just because you’re a day trader today doesn’t mean you won’t become a long-term investor at some point. The primary types of investors are as follows:

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Day Trader: As the name implies, a day trader buys and sells securities in a single day. As a day trader you might buy and then sell a security on the same day, or sell short and then buy a security on the same day.

Long-Term Investor: A long-term investor will intend to hold a security or other asset for at least a year and usually longer.

Mutual Fund Investor: A mutual fund investor specializes in — you guessed it — mutual funds. For many people, this is the ideal route to go as mutual funds are easily managed.

A Forex Trader: If you decide to skip the stock market and instead look into a foreign currency exchange, you’ll be what’s called a forex trader. Forex is a global market where currency is bought and sold. You have to know what you’re doing, however, as forex trading can be risky.

Municipal Bond Investor: Municipal bond investors dabble in debt securities issued by states, cities, towns, counties and U.S. territories to finance projects such as schools and highways. These are typically low-risk investments, provided you buy them from a reliable company or directly from a government entity.

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Alternative Markets Investor: Alternative market investors look to grow their money by investing in real estate, hedge funds, water rights, commodities, precious resources and other assets that lie outside traditional financial markets.

2. Select Your Investments

With a Roth IRA you can choose your investments, including exchange-traded funds, stocks, Treasuries, bonds, CDs and more. No matter which type of investment you choose, a Roth IRA generates earnings that are completely tax-free whenever you decide to withdraw them, provided you’ve reached the age of 59 1/2 and waited five years since your first contribution.

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3. Choose Your Provider

Nearly all large financial institutions, mutual fund companies, banks and brokerage firms have financial advisors on hand to help you open a Roth IRA, either online or in person. These advisors also offer advice on putting together a diversified retirement portfolio within your Roth IRA.

The most glaring difference between providers is typically the fee structure. Before deciding on a provider, be sure to ask a few questions:

  • Does the company offer a range of investment options?
  • Does the company provide good customer service to answer your questions, either in-person, online or over the phone?
  • Does the company provide a fee schedule?
  • Does the company have the kind of information and costs needed to buy and sell investments?

Choosing a Brokerage

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A broker is a registered professional whose role is to buy, sell and trade stocks or other securities on behalf of clients. When choosing an online broker to begin your Roth IRA retirement account, make sure the broker can meet the top priorities on your list. You’ll also want to establish whether the broker is a full-service broker or a discount broker. A discount broker charges lower fees and commissions, but you’ll have to choose your own investments. A full-service broker charges higher fees, which pay for the broker’s investment advice.

Before choosing a broker, you might want to ask these questions first:

  • Is the broker licensed in your state?
  • Has the broker received any serious complaints from investors?
  • What is the broker’s education and professional experience?
  • How does the broker get paid? By commission? Based on a percentage? Does the broker get paid more for selling his or her own firm’s products?
  • What is the total cost of doing business with the broker?

Before you open an account with a broker, you’ll also want to thoroughly understand what you’re getting into by finding out the following:

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  • What is in the broker agreement and what are its terms and conditions?
  • Does the broker understand your financial goals and how much you can invest?
  • Who makes the decisions about what you buy and sell?

Choosing a Robo-Advisor

A robo-advisor is a digital platform that provides algorithm-driven financial planning services with little to no human interaction. A typical robo-advisor uses an online survey to collect information from clients about their financial situations and goals. That data is then used to make investment decisions on behalf of the client.

Robo-advisors have low starting deposits and offer portfolio management, easy account setup and attentive customer service. You can be a novice and still use a robo-advisor.

Related: The Best Brokers of 2019-2020

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4. Gather the Necessary Documents

Most brokerages and banks have the resources to complete your Roth IRA application online or in person. To open your Roth IRA, you’ll need the following:

  • Name, address and contact information
  • A driver’s license or other form of photo ID
  • Your Social Security number
  • Your bank’s routing number and your checking or savings account number so you can transfer money directly to your new account
  • The amount of money you want to invest
  • The name and address of your employer
  • The name, address and Social Security number of your plan beneficiary.

As part of the application process, you will also have to fill out a 5305-R form for the Internal Revenue Service.

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5. Make Your First Deposit

The bank, broker or other financial institution will determine the minimum deposit to open your Roth IRA. For that reason, one of the first decisions you’ll need to make is how much you can comfortably make as your first deposit.

As an example, T. Rowe Price and Vanguard both require minimum deposits of $1,000 to open a Roth IRA. Vanguard also charges a $20 annual account service fee but will waive that fee if you register your account online and sign up for e-delivery.

Neither Fidelity nor Merrill Edge has a minimum initial deposit, though Merrill Edge does charge $25 on its 529 NextGen Direct account. Discount broker Ally Invest also has no minimum initial deposit for stocks and ETFs, whereas robo-advisor Wealthfront has a $500 account minimum.

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What Investments Should Be in Your Roth IRA?

The main selling point for a Roth IRA is that you can withdraw your funds tax-free at retirement. Another, less-heralded perk is that you get to choose from a wide range of investments. For the experienced investor this can be very appealing, but for someone who has little knowledge of stocks, bonds, foreign currencies and other investments, it can be a little intimidating.

Why and How Should You Diversify?

While there are dozens of investment choices, the way you choose investments comes down to your investment goals and risk tolerance. Younger investors tend to take on more risk because they have the time to make up for any losses. As a general rule, the older you are the less risk you’ll want to take on.

A couple of other things to consider:

  • When choosing your investments, gauge how comfortable you are with risk, regardless of your age. Stocks tend to go up and down — sometimes dramatically. If that makes you uneasy, you might want to put most of your money in something less volatile.
  • If you diversify your portfolio, make sure you understand the risk and return on each investment. Risk gauges the safety of the money you’ve invested whereas return gauges how fast and high your money will grow.

Although a diversified portfolio doesn’t guarantee you’ll make a good return on your investments, it does improve your chances. Here are a couple of reasons why:

  1. Diversifying your portfolio means that you aren’t dependent on any one type of investment to reach your retirement goals, meaning your risk is spread more evenly.
  2. High-performing assets can counterbalance losses or stagnation from underperforming assets.

As much as you’d like to guarantee smooth sailing into retirement with a winning investment formula, the fact is there’s no perfect mixture of stocks, bonds, securities, commodities, cash and alternative investments. The investments that work best for you change at different times in your life, depending on how long you have to invest and your ability to tolerate risk.

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Roth IRA Rules

Various rules apply about when you can take money out of your Roth IRA account without triggering taxes or early withdrawal penalties, so it’s a good idea to familiarize yourself with these rules. You also need to be careful about how much you withdraw. Normally, to make a “qualified IRA distribution” in retirement, you must have had your Roth IRA for at least five years and be at least 59 1/2 years old.

Other rules to consider:

  • To participate in a Roth IRA, you must meet IRS income requirements.
  • Eligible participants under the age of 50 can contribute a maximum of $6,000 per year. People age 50 or older can contribute up to $7,000 per year.
  • There is no required minimum distribution age.
  • You cannot deduct contributions to a Roth IRA.
  • If you satisfy the requirements, qualified distributions are tax-free.
  • You can leave amounts in your Roth IRA as long as you live.
  • You can make contributions to your Roth IRA after you reach age 70 1/2.
  • The account or annuity must be designated as a Roth IRA when it is set up.

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Understand Contribution Limits

You can open a Roth IRA as long as you meet the employment and income requirements, but there are income limits based on your adjusted gross income, or AGI. Income limits vary depending on your marital and filing status. Because Roth IRA contribution limits are also dependent on your marital status, it’s a good idea to check which category you fall into before opening your IRA.

You should also research how special circumstances might affect your Roth IRA, such as the disability or death of the account holder.

The current contribution limits are as follows:

Roth IRA Filing Status
Filing StatusModified AGIContribution Limit
Married filing jointly or qualifying widow(er)< $193,000
> $193,000 but < $203,000
>/ $203,000
Up to the limit
A reduced amount
Zero
Married filing separately and you lived with your spouse at any time during the year< $10,000
>/ $10,000
< $122,000
A reduced amount
Zero
Up to the limit
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year< $122,000
> $122,000 but < $137,000
> $137,000
Up to the limit
A reduced amount
Zero

A Roth IRA for a Brighter Tomorrow

A Roth IRA provides a tax-advantaged way to save for retirement. Unlike a traditional IRA, where you deduct contributions now and pay taxes on withdrawals later, a Roth IRA lets you pay taxes on contributions now and get tax-free withdrawals later. If you’re looking for a retirement plan that can meet your long-term retirement goals with fewer limitations than other plans, a Roth IRA is a good option.

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