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A is a true gift for retirement savers: You pay taxes on your contributions up front, you let that investment compound, and then your withdrawals in retirement are tax-free.
Here's a step-by-step guide on how to open a Roth IRA:
Roth IRAs do have income limits, which can reduce or eliminate your ability to contribute to a Roth. The 2021 contribution limit is up to $6,000 ($7,000 if 50 or older) for below $140,000 (single filers) or $208,000 (married filing jointly). If your income exceeds those limits, the strategy lets you open a Roth by converting money from a traditional IRA.
Eligible? Awesome. Now consider your investing preferences.
The next step in how to open a Roth IRA is to find a home for your account.
For people who want to pick their own investments, opening a Roth IRA at an online broker makes a lot of sense. At the best brokers, you’ll find a large list of low-cost investments to choose from, including index mutual funds and exchange-traded funds. The top brokers also offer extensive retirement planning tools, robust customer service and reasonable account minimums and fees. And you maintain complete control over how your retirement funds are invested.
For people who want to invest for retirement but don’t want to worry about managing their portfolio over time, a robo-advisor is an easy choice. Generally, robo-advisors hire investment pros to develop a handful of portfolios aimed at different types of investors. Some robos offer portfolios that vary based on amount of risk, with “aggressive” ones for people who want a high percentage of their portfolio in stocks and “conservative” for people who seek a less volatile investment account.
As an investor, all you have to do is open your Roth IRA, link your bank account and follow the steps the provider uses to build your portfolio. The robo-advisor then purchases the investments for you and manages the account over time. Many robos also offer services that can help maximize your savings, such as goal-setting tools to get your finances on track, and strategies to reduce your tax bill. (Robo-advisors generally are registered investment advisors, operating under a similar structure to human investment advisors.)
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The last step in learning how to open a Roth IRA is to decide where to invest the money in the account.
A Roth IRA is an account, not an investment. Contributing is just the first step. If you want to build wealth over time, you need to invest that money.
» Roth IRA calculator:
If you're a hands-off investor, you can choose a robo-advisor and they'll choose a diversified investment portfolio for you.
If you're a DIY type, you can get that diversification on your own for less by building a portfolio out of index mutual funds and ETFs. To do that, you’ll want to decide how much of your money to put toward riskier investments, like stock funds, and how much you want to keep relatively safe, in bond funds and cash. This mix is called your .
give you access to a large pool of investment options. Once you’ve decided on your allocation, you can select specific funds to meet that.
If you get stuck? Use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them, being sure to rebalance as needed since they won’t be doing it for you.
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That's it. Except, a handful of considerations: