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A Roth IRA 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:
1. Figure out if you qualify
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 modified adjusted gross incomes below $140,000 (single filers) or $208,000 (married filing jointly). If your income exceeds those limits, the backdoor Roth IRA strategy lets you open a Roth by converting money from a traditional IRA.
2. Decide what type of investor you are
Eligible? Awesome. Now consider your investing preferences.
If you're a “do-it-yourself” investor, choose a brokerage. You can open a Roth IRA at an online broker and then choose your own investments. This may be simpler than you think — you can build a diversified portfolio with just three or four mutual funds. When comparing brokers, look at trade commissions and investment fees (also called expense ratios).
If you're a “manage it for me” investor, choose a robo-advisor. If you’d rather have someone pick an investment portfolio for you, you can open your Roth IRA at a robo-advisor. Robo-advisors are online services that build and maintain a diversified portfolio for you. You pay a small fee for the service, but their fees generally are far lower than a human financial advisor.
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3. Choose a provider and open your Roth IRA
The next step in how to open a Roth IRA is to find a home for your account.
Finding the best Roth IRA brokers as a 'do-it-yourself' investor
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.
Finding the best Roth IRA robo-advisors as a 'manage it for me' investor
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.)
» Check out all of our top picks for best Roth IRA accounts
4. Select your investments
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: Find out how much your contributions could be worth at retirement
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 asset allocation.
IRAs 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.
» Dig deeper: Check out these simple investments for retirement goals
Is that it?
That's it. Except, a handful of considerations:
If you have a 401(k) that offers matching dollars and you’re not contributing enough to earn them all, that's where you should direct your retirement savings first.
There are two main types of IRA: Roth and traditional. Traditional IRAs can come with an upfront tax break, but we generally recommend the Roth for those who qualify. Here's why: Early withdrawal rules are much more flexible with a Roth, and there are fewer restrictions for retirees. Plus, unless you're an extremely disciplined saver, you'll end up with more after-tax money in a Roth IRA. Here's more on a Roth vs. traditional IRA.
Once you figure out how much you can contribute, consider setting up automatic transfers. Not only do you avoid the hassle of initiating the transfer each month, but you ensure you’re saving regularly. (Also, some brokers waive their initial deposit requirement if you agree to automatic transfers each month.)
Be sure you don’t contribute too much. Contributing more than the annual limit — $6,000 in 2021 ($7,000 if age 50 or older) — may leave you subject to an IRS penalty. Keep in mind that the contribution limit is for all your IRA accounts combined — if you have a Roth and a traditional, that limit is a total across both accounts.