What Is a Roth IRA? Rules & How to Open One
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Table of contents
- What is a budget planner?
- Life insurance buying guide
- Fidelity is best for:
- Vanguard is best for:
- Key takeaways
- » This page is out of date
- 6 steps to opening a Roth IRA
- What is the Section 179 deduction?
- What is a meme stock?
- Our Take
- Still deciding on the right carrier? Compare Medigap plans
- When is the best time to pay your credit card bill?
- What is a charitable donation?
- Bizee: Easily form your new business
- What is modified adjusted gross income (MAGI)?
- What is a W-4?
- What are mutual funds?
- How to get paid on TikTok
- 1. What credit cards are available
- What are dividend stocks?
- How to make money as a kid
- How do capital gains taxes on real estate work?
- What is stock research?
- What is an index fund?
- S&P 500 index (SPX) today
- Best-performing biotech ETFs
- How to get paid on YouTube
- Microsoft Office Excel budget templates
- What is a Roth IRA account?
- 7 of the best apps to make money
- How meme stocks work
- Pros & Cons
- 1. Save more
- Which state do you owe taxes to?
- How much should you spend on rent? It depends
- What is MAGI used for?
- Step 1: Choose your health insurance marketplace
- Not enough affordable homes
- 7 best-performing AI stocks
- The best AmEx transfer partners
- When to follow up after no response
- Best stocks by one-year performance
- What is a down payment?
- How much are taxes on lottery winnings?
- 1. Get passports for everyone
- What does this value mean?
- 1. Best Western
- Chase checking accounts
- Create a budget plan that works for you
- How we found the best travel insurance
- What is a virtual assistant?
- Fidelity at a glance
- The best flight booking sites
- The best budget apps
- Amazon credit card options
- Average car loan interest rates by credit score
- California state income tax brackets and rates
- 1. Sell spare electronics
- How the Hilton Honors daily food and beverage credit works
- 1. Tax on capital gains
- Life insurance calculator
- January
- 1. Business name reservation form (corps and LLCs)
- Should you have more than one credit card?
- Working with National Debt Relief
- What is a state income tax?
- Pros of refinancing your car loan
- How we got here
- Home warranty vs. home insurance: The basics
- Target REDcard™ Credit Card
- Best ways to consolidate credit card debt
- Late winter and early spring
- How much should you save each month?
- A look back: The Fed rate and how it affects you
- 5 Ways to get started in real estate investing
- How the Section 179 tax deduction works
- The 41 best online business ideas
- A fraudulent transaction is suspected
- Flight options
- A quick look at the billing cycle
- Is charitable giving tax-deductible?
- International roaming plans: postpaid
- Red Way or Global Crossing?
- How to budget money
- 1. Clean up your credit
- Summary of Visa Infinite benefits
- The bull call spread
- Average retirement savings balance by age
- What does it mean to invest in the S&P 500?
- How to make money online
- What is the standard deduction?
- How biotech ETFs work
- How much do Instagram influencers make?
- Vanguard at a glance
- Roth IRA vs. traditional IRA: What's the difference?
- How to invest in stocks in 6 steps
- What is the child tax credit?
- The best money-making apps
- How to track your refund status with ‘Where's My Refund?’
- Paying won't take a collections account off your credit reports
- Mint vs. NerdWallet at a glance
- What are estimated tax payments?
- ¿Qué estrategias ha utilizado Yang para generar riqueza?
- Table of Contents
- What is the 10-year Treasury?
- Why Americans can’t buy cheap Chinese EVs
- 2. Sell your gift cards
- 7 best investments right now
- 50/30/20 budget calculator
- How to find your EIN
- Steps for filling out the FAFSA for emancipated minors
- 4 steps to research stocks
- The best burial insurance in March 2024
- How do index funds work?
- Why invest in mutual funds?
- Your own insurance usually comes first
- Find out how much your car is worth
- Lottery tax calculator
- Where to get home insurance quotes
- What you can dispute
- Guardian Life insurance
- What does a virtual assistant do?
- 20 high-dividend stocks
- Ways to earn money as a younger kid
- How is PMI calculated?
- How to choose between a Roth IRA and a 401(k)
- Northwestern Mutual life insurance
- 2. Articles of incorporation (corps only)
- How to fill out a W-4
- Are these the best stocks to buy now?
- Median income by state: 2022
- Great Lakes is transferring loans to Nelnet
- Google Sheets budget templates
- YNAB, for hands-on zero-based budgeting
- The best home insurance companies of 2024
- 2. Know your number
- Work out how much of your income should go to rent with the 50/30/20 rule
- Stacked rewards let Flex cardholders score big
- 3. Pawn something
- Why go from term life to permanent life
- How we ranked the top life insurers
- Do you need to put 20% down on a house?
- Does Zelle report to the IRS?
- How state income tax rates work
- Calculator: Convert Alaska miles to dollars
- 2. Marriott
- How many Instagram followers do you need to make money?
- Grants
- Rewarding at-home routines
- How much is PMI?
- What expenses qualify for Section 179?
- Mortgage interest
- 2. Tax on dividends
- How tax-deductible donations work
- What is the 50/30/20 rule?
- How to write a follow-up email after no response
- Why invest in index funds?
- Active vs. passive mutual funds
- Median retirement savings balance by age
- Holiday weekends
- How does a Roth IRA work?
- How much is the 2023 child tax credit?
- Effect on credit scores depends on provider and debt type
- When do you pay capital gains tax on a home sale?
- Meme stock history
- 3. Allocate accordingly
- Are auto loan interest rates rising?
- Paying early could help your credit
- How to manually calculate how much life insurance you need
- February
- Step 2: Compare types of health insurance plans
- When will the auto market return to normal?
- Is there a Zelle tax loophole?
- How do lottery taxes work?
- 2. Consider TSA PreCheck or Global Entry
- Chase direct deposit requirements for checking accounts
- What you shouldn’t dispute
- Guardian Life insurance policies
- Investing for income: Dividend stocks vs. dividend funds
- Amazon personal credit cards at a glance
- How do Hyatt points compare to other hotel programs?
- When are estimated taxes due?
- What is the 10-year treasury yield today?
- Unauthorized activity is detected
- 4. Work today for fast cash today
- Northwestern Mutual life insurance policies
- 3. Articles of organization (LLCs only)
- How to find the best stocks to buy now
- Trading in a car with positive equity
- Should I buy stocks when markets are at all-time highs?
- How the standard deduction works
- How do Alaska miles compare to other airlines?
- How to monetize your Instagram with fewer followers
- How much do virtual assistants make?
- Average annual PMI premium
- Other alternatives to Mint
- Best homeowners insurance companies: Pros and cons
- How to establish domicile
- Renovation loans open more doors
- Where to look for information
- How Chase checking account fees compare
- What’s covered?
- Am I stuck with Nelnet until my loans are paid off?
- NerdWallet’s budget planner
- What to expect in 2024
- PMI calculator help
- When will I get my 2024 tax refund?
- Una perspectiva opcional para FIRE
- 4. Understand withdrawal rules
- How to use average car interest rates
- How much rent can you afford?
- Determining your income tax liability
- Hotel breakfasts continue to evolve, and this iteration is solid
- Minimum down payment requirements
- 2. Rebalance your debts and income
- Understanding biotech ETF holdings
- When are state income tax returns due?
- Use a budget planner
- Child tax credit 2024
- Paying off a collections account could help you in other ways
- 2023 Section 179 deduction limit
- How easy is it to earn Hyatt points?
- Will the U.S. ever make cheap EVs like China?
- 5. Seek community loans and assistance
- Home equity loan interest
- International roaming: prepaid
- How investing pays off later
- Best burial life insurance policies for 2024
- Should they be from the same bank?
- What is an index?
- When is the best time to use Alaska miles?
- 3. Hilton
- Wells Fargo Active Cash® Card
- Prime Visa
- 3. Taxes on investments in a 401(k)
- March
- 4. Corporate bylaws (corps only)
- Red Way routes
- What are AI stocks?
- An alternative to chasing the best stocks
- The bear put spread
- Median income by city: 2021
- Get a secured credit card
- 5 ways to make money on Instagram
- Best travel insurance overall: Berkshire Hathaway Travel Protection
- How to become a virtual assistant
- All year
- What can you invest in with a Roth IRA?
- How do I check my tax return status?
- 5 best-performing meme stocks
- Estimated tax payments 2024
- Full Review
- 5. Consider part-time work in retirement
- Watch out for foreign transaction fees
- 6. Ask for forbearance on bills
- 4 more ways to estimate how much life insurance you need
- Trading in a car with negative equity
- Retirement savings by age
- Cons of refinancing your car loan
- Scholarships
- A membership fee with benefits
- Child tax credit expansion: What the tax deal could mean for you
- 2024 Section 179 deduction limit
- How to convert Hyatt points to dollars
- Price vs. yield
- California income tax deadlines and extensions
- When dual residency might apply
- Try a simple budgeting plan
- Purchase protection
- How to invest in mutual funds
- Do I have to pay state tax on lottery winnings?
- 3. Have a notarized letter for solo-parent travel
- How to invest in the S&P 500 in two steps:
- Types of state income tax
- Frequently asked questions about Chase checking accounts
- Guardian life insurance rates
- The Federal Trade Commission’s budget worksheet
- ¿Qué significa la riqueza generacional para Yang?
- 7. Request a payroll advance
- Reliability
- Discount points
- Sole proprietorship taxes: Special deductions
- Paying early also cuts interest
- 1. High-yield savings accounts
- What to ask your credit card issuer
- Why doesn’t Zelle send you a 1099?
- Compare Roth 401(k) vs. traditional 401(k)
- Standard deduction 2023
- 2. The Southwest card limits
- Getting your savings ready for 2024
- Are Roth IRAs insured?
- Goodbudget, for hands-on envelope budgeting
- Why haven't I received my tax refund?
- Northwestern Mutual customer complaints and satisfaction
- Problems with the food and beverage credit
- National Debt Relief at a glance
- 3. Don’t ask for too much cash
- Historical Alaska mile values
- 4. Radisson
- Debt-to-income ratio 101
- ‘Hummer tax deduction’: Which vehicles does Section 179 cover?
- How can I get more value from my Hyatt points?
- Who should make estimated quarterly tax payments?
- 5. Operating agreement (LLCs only)
- Pitfalls to watch for
- How much do index funds cost?
- 4. Download apps and shows, charge devices
- How to choose a biotech ETF
- Dispute responsibly
- Guardian Life insurance customer complaints and satisfaction
- How to reach Nelnet customer service
- How much should you spend on a mattress?
- What’s a spousal Roth IRA?
- Terms connected to meme stocks
- Your card has a hold placed on it
- Factor in other costs
- 8. Take a loan from your retirement account
- April
- Red Way ticket options and bag policy
- How to find another company's EIN
- What to know about National Debt Relief
- How to invest in dividend stocks
- Do I have to pay California state tax?
- Property taxes
- Where Northwestern Mutual stands out
- Hilton’s new food and beverage credit prioritizes flexibility
- 4. Tax on mutual funds
- Managing expectations
- Standard deduction 2024
- How flexible are Alaska miles?
- Fellowships and assistantships
- More ways to take charge of your budget
- 9. Borrow against life insurance
- Getting started
- W-4 form 2024
- Diversifying with index funds
- Final steps
- How to buy biotech ETFs
- 5. International Hotels Group (IHG)
- More about Guardian Life insurance
- Mattress-buying tips
- Should you get it?
- Should I file taxes now or wait for the child tax credit expansion?
- Estimate your 2024 IRS tax refund date
- Additional functionality
- Amazon Visa
- What is a meme stock ETF?
- Why is the 10-year Treasury yield important?
- How to handle your state tax liability
- Why the due date is so important
- MAGI vs. AGI: What's the difference?
- How to invest in AI stocks
- Decent AmEx transfer partners
- The long straddle
- So, should you switch to Zelle?
- Should I take a lump sum payment or annuity payments?
- What info do you need for a home insurance quote?
- Get a credit-builder product or a secured loan
- Should I refinance my car?
- Blue Cash Everyday® Card from American Express
- 3. The Rapid Rewards earning structure
- Ways to earn money as a teenager
- How did we determine the Hyatt points value?
- Your card status has changed
- 10. Use a credit card cash advance
- Home office expenses
- Where Northwestern Mutual falls short
- 4. Consider a co-signer
- Return protection
- How to open a Roth IRA in 6 steps
- Does Section 179 cover real estate?
- Look for savings
- May
- 6. Meeting minutes (corps only, but beneficial for LLCs)
- How to calculate your modified adjusted gross income
- Risks of debt settlement
- 5. Pack smart
- How to save money every month
- How quickly could the IRS implement the child tax credit expansion?
- What is California's standard deduction?
- 11. Look for a payday alternative loan
- 2. Certificates of deposit
- Get more help with monthly budget planning
- How to find the 2024 W-4
- What’s next
- Standard deduction for those 65 or older
- How did we determine the value of Alaska miles?
- 6. Choice Hotels
- Best for emergency medical coverage: Allianz Global Assistance
- Where to find virtual assistant jobs
- Employer tuition assistance
- Are 10-year Treasury notes a good investment?
- More about Northwestern Mutual
- 5. Tax on the sale of a house
- Other tips for managing your bill
- Step 3: Compare health plan networks
- How to change or cancel an EIN
- Why you may not be getting a response after an interview
- Quick start guide: How to invest in index funds
- Benefits of a larger down payment
- How much does it cost to invest in the S&P 500?
- How to complain about Nelnet
- Where's my 2024 state tax refund? Track your status
- Can I make money with meme stocks?
- How to calculate quarterly estimated taxes
- Medically necessary home improvements
- Shopping for term life insurance
- How to find AI ETFs
- How do I deal with lottery taxes?
- 2023 state income tax rates and brackets
- Requirements: Who qualifies for the child tax credit?
- Calculating capital gains tax on a home sale
- What if you don’t qualify for Section 179?
- There are typos or everyday mistakes
- 12. Get a personal loan
- Airline loyalty programs
- How to compare home insurance quotes
- 7. Hyatt
- Benefits for all Chase checking accounts
- What’s not covered
- EveryDollar, for simple zero-based budgeting
- Amazon Store Credit Card
- What part of my income gets taxed by California?
- How to file your sole proprietorship tax returns
- Claiming tax-deductible donations on your tax return
- 7. Board resolutions (corps only, but beneficial for LLCs)
- Do I have to update my W-4 every year?
- 5. Use collateral to secure the loan
- Use a co-signer
- 4. The value of Southwest points
- Loans
- How to get a tax refund sooner
- How do you buy 10-year Treasury notes?
- June
- 3. Bonds
- How much should you put down on a house?
- 13. Rent out a room
- The long strangle
- Homeowner costs that aren't tax-deductible
- Tips for calculating how much life insurance you need
- National Debt Relief vs. other options
- 8. Wyndham
- Additional child tax credit
- Do you pay tax on T-notes?
- Am I a resident for California state tax purposes?
- How to adjust your Form W-4
- 7. Consider shipping items to your destination
- Become an authorized user
- Standard deduction for dependents
- BankAmericard® credit card
- Could we be in an AI bubble?
- 6. Find the right lender
- How to settle a dispute with Nelnet
- Are these the best dividend stocks?
- Next Steps
- Will you owe capital gains taxes on your home sale?
- 14. Moonlight as a dog sitter
- Get tax help for complex issues
- Term vs. whole life insurance tool
- July
- 8. Stock certificate (stock-issuing corps only)
- Step 4: Compare out-of-pocket costs
- Other considerations to determine your down payment
- What is the average and median retirement savings?
- Best for travelers with pre-existing medical conditions: Travel Guard by AIG
- 5. How to earn a Southwest Companion Pass
- Amazon Secured Card
- How to estimate taxes for an income tax extension
- Charitable deductions 2023
- Trip delay reimbursement
- 8. Seek out playgrounds inside the airport terminal
- 2024 state income tax rates and brackets
- Another Chase checking account perk: the Chase Disney debit card
- 15. Become a rideshare or delivery driver
- 9. Shareholder agreement (stock-issuing corps only)
- Red Way aircraft and seat types
- When can't you take the standard deduction?
- Cards with primary coverage
- How much money can you make on YouTube?
- Empower Personal Dashboard, for tracking wealth and spending
- How to claim the child tax credit in 2024
- How to avoid capital gains tax on real estate
- 16. Cut your insurance premiums
- Calculating MAGI: Example
- The bottom line on how to research stocks
- 9. Head to airport lounges for snacks
- Should I invest in an S&P 500 index fund or S&P 500 ETF?
- 6. The valuable extra benefits
- August
- How Chase premium checking accounts compare
- How to pay estimated taxes
- The synthetic long
- Get credit for the bills you pay
- How much is my 2023 standard deduction?
- Ways kid creators can earn online
- Important considerations when opening a Roth IRA
- 10. Annual report (corps and LLCs)
- Should you invest in AI stocks?
- American Express add-on coverage
- The bottom line
- 10. Hit the bathroom before boarding
- What is credit card consolidation?
- 17. Consolidate your debt
- More reading for active investors
- U.S. Bank Shopper Cash Rewards™ Visa Signature® Card
- When to expect your child tax credit refund
- After deciding
- Amazon business credit cards at a glance
- The worst AmEx transfer partners
- Are there drawbacks to investing in the S&P 500?
- Additional benefits for premium Chase checking accounts
- Earn an audience, and earn more in the long run
- 7. The wait
- When to file sole proprietorship taxes
- September
- 11. Form S-2553 (for S-corp election)
- Travel accident insurance
- 11. Keep their favorites handy in a small carry-on
- Best for those who pack expensive equipment: Travel Insured International
- Waiting periods
- Is consolidating credit card debt a good idea?
- Frequently asked questions about estimated tax payments
- 18. Refinance your student loans
- It pays to know
- Is there an over-55 home sale exemption?
- 4. Funds
- Practice good credit habits
- 2023 vs. 2024 standard deduction
- Consequences of a child tax credit error
- Amazon Business Prime American Express Card
- 19. Change your cell phone plan
- Online legal companies can help with incorporation documents
- Does Red Way have a loyalty program?
- Step 5: Compare benefits
- W-4 calculator
- Lost luggage reimbursement
- Home insurance quote comparison example
- 12. Have a plan for ear pressure
- Is a Chase checking account the right choice?
- Cost, service fees and deductibles
- Other ways to make money
- If you're considering applying for a Southwest credit card
- California state tax credits
- Tips for making money as a kid
- PocketGuard, for a simplified budgeting snapshot
- Avoid risky loans
- October
- Mutual fund types
- 13. Indulge them
- When to claim the standard deduction
- Modified adjusted gross income: The bottom line
- State child tax credits
- Other things to know about Red Way
- What else to know about Form W-4
- At your destination
- What if you're not eligible?
- Check your credit scores and reports
- Capital One Venture Rewards Credit Card
- What is the $500 credit for other dependents (ODC)?
- Credit cards
- November
- Alternatives to the best burial insurance
- Additional tips for making money on TikTok
- Best for adventurous travelers: World Nomads
- How claims work
- Final thoughts on the new Red Way airline
- Best stocks for beginners
- Final thoughts on the best flight booking site
- Child tax credit vs. child and dependent care credit
- More resources
- Additional Visa Infinite benefits
- 15. Involve them in the planning
- Amazon Business American Express Card
- More about top-rated life insurance companies
- What are the Roth IRA rules?
- Summary: How to choose health insurance
- Which homeowners insurance companies should I consider?
- How to travel with a toddler, recapped
- Honeydue, for budgeting with a partner
- December
- If you want to redeem your AmEx points for good value
- The bottom line on investing in stocks
- How to track your California state refund
- How do mutual fund profits work?
- How much does home insurance cost?
- Best for medical coverage: Travelex Insurance Services
- Instacart Mastercard®
- Which Amazon credit card is best for me?
- California sales tax
- What goes into a homeowners insurance quote?
- How to make money from home
- Budgeting resources from NerdWallet
- Fees
- Home insurance vs. home warranty: Bottom line
- 5 things to know about California state tax
- Mutual funds vs. ETFs vs. stocks
- Other ways to earn money
- 5. Stocks
- Methodology to identify the best budget apps
- Other home insurance companies to consider
- Best if you have travel credit card coverage: Seven Corners
- How to get a cheap homeowners insurance quote
- Is Spirit better than Frontier?
- 6. Alternative investments
- How to make money offline
- Best for long-term travelers: IMG
- 7. Real estate
- Best for travelers with unpredictable work demands: Tin Leg
- How to choose the best investments in 2024
- Best for booking travel with points and miles: TravelSafe
- How to choose an online business idea
- Best for group travel insurance: HTH Insurance
- How to find the best home insurance policy in five common scenarios
- Types of travel insurance
- How to compare homeowners insurance
- Watch out for making money scams
- What does travel insurance cover?
- What’s not covered?
- Find the best homeowners insurance in your state
- How we ranked the best homeowners insurance companies
- How much does it cost?
- Do I need travel insurance?
- How to choose the best travel insurance policy
- What are the top travel destinations in 2024?
- More resources for travel insurance shoppers
- Methodology
What is a Roth IRA account?
A Roth IRA is an individual retirement account that takes after-tax dollars, then provides tax-free growth and withdrawals in retirement. Once you're 59 1/2 — and the account has been open for at least five years — you can withdraw from your Roth IRA without paying federal taxes.
» Ready to get started? See our top picks for the best Roth IRA accounts.
Roth IRA vs. traditional IRA: What's the difference?
The main difference between a Roth IRA and traditional IRA is how they're taxed. Roth IRAs give you tax-free withdrawals in retirement, while traditional IRAs give you a tax break when you contribute.
You can have both a Roth IRA and a traditional IRA, and your contribution strategy can depend on your needs and retirement plans. If you want an immediate tax break, consider a traditional IRA. If you like the idea of tax-free income in retirement, Roth IRAs might be a better option for you. You can read our Roth IRA vs. traditional IRA article to learn more about the differences.
» Learn more: Find the best IRA account for you
How does a Roth IRA work?
A Roth IRA works by taking after-tax dollars from a qualifying source of earned income. Money contributed to your Roth IRA could come from a job, but could also be a rollover from a Roth 401(k) plan, conversion from an existing traditional IRA or 401(k) plan, a spousal contribution, or other transfer. (More on these options below.)
Then, you’ll need to choose a broker to open your Roth IRA and select where you want to invest the money. Over a long time horizon, those investments could earn a return.
That’s where the real benefit of the Roth IRA kicks in: Your investment growth could have been taxed when it was time to withdraw the money, but because you didn’t receive a tax benefit when you funded the account, you’ll get the money tax-free. And, unlike a 401(k) or a traditional IRA, you aren’t required to take required minimum distributions (RMDs) after a certain age.
And if for some reason you need the money in your Roth IRA before retirement, you can withdraw the contributions — but not investment earnings — at any time without additional taxes or penalties from the IRS.
» See how your contributions can grow: Use our free Roth IRA calculator
What can you invest in with a Roth IRA?
There are several types of securities you could invest in using your Roth if you choose a more hands-on approach to investing. Some of them include:
Are Roth IRAs insured?
If your retirement account is with a bank that offers FDIC insurance, it is insured, but under a different category from normal deposit accounts. What this means for retirement accounts is that you still get $250,000 in insurance protection, but it’s a combined limit across any traditional and Roth IRAs held at that bank.
What’s a spousal Roth IRA?
A Roth IRA is considered a spousal Roth IRA when a working spouse contributes to the account on behalf of their partner who earns little or no income. It’s an exception to the rule where only those with earned income can contribute to their IRA.
Spousal IRAs have strict rules, including that the couple must file as “married filing jointly” on their tax returns, fall under the income limit for Roth IRAs, and have the account solely in the non-working spouse’s name.
» MORE what you need to know about spousal Roth IRAs
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How to open a Roth IRA in 6 steps
1. Find out if you're eligible.
Roth IRAs have income limits, so anyone can have a Roth IRA, but the ability to contribute depends on your annual income. At higher levels, that amount is phased out and, eventually, eliminated.
For 2024, the contribution limit is to $7,000 if your MAGI is below $146,000 (single filers) or $230,000 (married filing jointly. The max contribution amount goes up $1,000 if you’re 50 or older.
At incomes above that, your contribution limit begins to phase out, until it is eliminated completely at $161,000 for single filers in 2024 and $240,000 for those married filing jointly in 2024.
» Dig deeper: Read our full guide to Roth IRA income and contribution limits
2. Decide what type of investor you are.
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 that are in different asset classes. When comparing brokers, look at trade commissions and the investment fees of their offered funds (also called expense ratios).
If you're a “manage it for me” or hands-off 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.
3. Choose how much you want to invest.
How much do you need to open a Roth IRA? While there generally isn’t a fee for opening a Roth IRA, there may be other costs and requirements depending on your provider and selected investments. Some brokers and robo-advisors — but not all — may require a minimum amount to open an account with them, or charge trading commissions when investments are bought and sold.
Think about your budget, your time horizon, and investing goals, and consider investing only money you won’t need in the next five years. That way, you have time to ride out any highs and lows of the market.
4. Select a provider to open your Roth IRA.
The next step in how to open a Roth IRA is to find a home for your account.
If you're a 'do-it-yourself' investor, 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 'hands-off' investors, or those 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.)
5. Gather your paperwork.
So, you’ve learned all about how Roth IRAs work and even settled on a provider. Now what? It’s time to gather any paperwork or documentation you may need to set up your Roth IRA account.
Exact requirements may vary based on the financial institution, but generally, you may want to have the following information available during the sign-up process:
Access to a working email and phone.
An ID (such as a state driver’s license or a passport) to confirm your identity, address, and date of birth.
A Social Security number or tax identification number.
Proof of employment, if applicable.
The name, addresses and dates of birth of any beneficiaries you’d like to add to the account.
The name and addresses of any trusted contacts in case your account’s security is breached.
The routing and/or account numbers for the bank account you’ll use to fund your Roth IRA.
6. Pick your investments.
The last step in learning how to open a Roth IRA is to decide how to invest the money in the account. That's because a Roth IRA is just the account type, not an automatic investment. To build wealth over time, that money needs to be invested.
If you're a hands-off investor and you've opted to open your Roth IRA at a robo-advisor, that service will choose a diversified investment portfolio for you.
If you're a DIY investor, you can get that diversification on your own 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, such as stock funds, and how much you want to keep relatively safe in, for example, bond funds and cash. This mix is called your asset allocation.
And if you get stuck? Use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them. Be sure to rebalance the investments as they shift out of the original allocation you decided on, because you won’t have robo-advisors to do it for you.
What if you're not eligible?
If your income means you don't qualify to contribute to a Roth IRA, it still might be possible to receive the tax benefits of a Roth IRA.
Two options to explore would be a Roth IRA conversion and a backdoor Roth. To do a Roth IRA conversion, funds are transferred from a traditional IRA or a qualified employer-sponsored retirement plan (such as a 401(k) plan) into a Roth IRA. If moving money that previously received a tax deduction, then the Roth conversion would be taxable, though you'd still have the benefit of taking out any investment gains in retirement tax-free.
A backdoor Roth is a form of a Roth conversion but specifically relates to high-earners who, because they can't contribute to a Roth IRA, make nondeductible contributions to a traditional IRA first and then convert it into a Roth IRA. A correctly executed backdoor Roth typically does not generate taxes, as no deduction was received for that initial contribution, but there are some caveats, including whether the investor has an IRA balance or if any gains have occurred during the transfer.
» A step-by-step guide to backdoor Roth IRAs
What are the Roth IRA rules?
Once you've opened your account, here are a few withdrawal and distribution rules you must follow:
Roth IRA withdrawal rules
You can withdraw your original contributions whenever you want, without owing any penalties or taxes, no matter how long your account has been open. That's because the money you put in is money you've already paid income tax on.
When you withdraw money from a Roth IRA, the IRS always assumes your original contributions come out first.
People at least 59 ½ years old, and who have held their accounts for at least five years, can take distributions, including earnings, without paying federal taxes.
Roth IRA withdrawal penalty
Qualified withdrawals of investment earnings in the account come out tax-free. The key here is "qualified." If you withdraw earnings before 59 ½, or otherwise don’t meet the rules for a qualified withdrawal, the IRS may want a piece of those returns, in the form of taxes and a possible penalty.
Examples of qualified withdrawals before age 59 1/2 include a first home purchase, qualified education expenses, health insurance premiums while unemployed, disability-related expenses, having a baby or adopting. Be sure you understand all the rules of these exceptions.
» Get a better understanding of Roth withdrawal rules
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