A Roth IRA is a true gift for retirement savers: While there’s no immediate tax benefit, withdrawals in retirement are completely tax-free.
There are three steps to starting a Roth IRA:
- Decide what type of investor you are. Hands-on or hands-off? If you like the idea of picking and managing your own investments, then a broker makes sense. If you want someone to choose the best investments for you, then a robo-advisor is probably a good idea.
- Choose a provider and open your Roth IRA. Your choice should align with your investor type above. Opening a Roth account is simple and generally only takes about 15 minutes.
- Select your investments. If you go with a broker, look for low-cost mutual funds and ETFs. If you choose a robo-advisor, they’ll pick these for you. (Most banks offer savings products, rather than investments, so they’re generally not the best place to open a Roth IRA, which should be geared toward long-term growth.)
Read on for more details on each of these steps.
1. 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. 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.
2. Choose a provider and open your Roth IRA
Best Roth IRA brokers for 'do-it-yourself' investors
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.
Here are two of the favorites from our 2019 analysis of the best Roth IRA accounts:
Fees
$2.95
per trade
Account minimum
$0
Promotion
Up to $600
in cash bonus with a qualifying deposit to a new Merrill Edge Self-Directed account
The bottom line
Merrill Edge offers high-quality customer service, robust research and low fees — all with no account minimum. Customers of parent company Bank of America will love the seamless, thoughtful integration, with a single login to access both accounts.
Show pros & cons
Pros
Robust third-party research.
Free trades for Preferred Rewards clients.
Cons
$2.95 trade commission.
Minimum balance requirement for high-end platform.
Fees
$0.00
per trade
Account minimum
$0
Promotion
Up to $600
in cash bonus with a qualifying deposit
The bottom line
Retirement investors will find a lot to love with E-Trade’s IRA offering, including a large line-up of no-trading-fee mutual funds and an extensive library of retirement advice and tools. Plus, there’s no minimum account balance and no fee for stock or ETF trades.
Show pros & cons
Pros
No minimum balance.
Extensive research and tools.
Commission-free stock, ETF and options trades.
4,400+ no-transaction-fee (NTF) mutual funds.
Cons
$19.99 cost for trading non-NTF mutual funds.
Best Roth IRA robo-advisors for 'manage it for me' investors
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.)
Here are two of the favorites from our 2019 analysis of the best Roth IRA accounts:
Fees
0%
management fee
Account minimum
$100
Promotion
Free
career counseling plus loan discounts with qualifying deposit
The bottom line
SoFi Automated Investing is great for beginning, cost-conscious investors who favor a hand-off approach. Plus, as a customer you could be eligible for bonuses on other SoFi products.
Show pros & cons
Pros
Broad range of low-cost investments.
Free management through 2019.
Automatic rebalancing.
Customer support.
Access to certified financial planners.
Cons
Limited account types.
No tax-loss harvesting.
Fees
0.25%
management fee
Account minimum
$0
Promotion
Up to 1 year
of free management with a qualifying deposit
The bottom line
With its low-cost ETFs, automatic rebalancing, extensive tax strategies and retirement advice, Betterment is a strong bet for retirement investors. Betterment’s planning tools include advice on “asset location” — which types of investments are best for different types of accounts — and investors can sync outside accounts, as well.
Show pros & cons
Pros
No account minimum.
Robust goal-based tools.
Fractional shares limit uninvested cash.
Low management fee.
Cons
$100,000 minimum and higher fee for access to financial advisors.
» Check out all of our top picks for best Roth IRA accounts
3. Select your investments
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.
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:
- Roth IRAs do have income limits, which can reduce or eliminate your ability to contribute to a Roth. Click below to see if you qualify. (If your income exceeds those limits, the backdoor Roth IRA strategy lets you open a Roth by converting money from a traditional IRA.)
Roth IRA income limits for 2019
Filing status 2019 modified AGI Maximum contribution Married filing jointly or qualifying widow(er) Less than $193,000 $6,000 ($7,000 if 50 or older) $193,000 to $202,999 Contribution is reduced $203,000 or more Not eligible Single, head of household or married filing separately (if you did not live with spouse during year) Less than $122,000 $6,000 ($7,000 if 50 or older) $122,000 to $136,999 Contribution is reduced $137,000 or more Not eligible Married filing separately (if you lived with spouse at any time during year) Less than $10,000 Contribution is reduced $10,000 or more Not eligible Roth IRA income limits for 2018
Filing status 2018 modified AGI Maximum contribution Married filing jointly or qualifying widow(er) Less than $189,000 $5,500 ($6,500 if 50 or older) $189,000 to $198,999 Contribution is reduced $199,000 or more Not eligible Single, head of household or married filing separately (if you did not live with spouse during year) Less than $120,000 $5,500 ($6,500 if 50 or older) $120,000 to $134,999 Contribution is reduced $135,000 or more Not eligible Married filing separately (if you lived with spouse at any time during year) Less than $10,000 Contribution is reduced $10,000 or more Not eligible - 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 limit may leave you subject to an IRS penalty. If your goal is to spread that $6,000 over a year, contribute $500 a month in 2019. If you’re 50 or older, you can put in $583.33 a month. 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.
