How to Open a Roth IRA

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how to open a Roth IRA
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Do you want to open a Roth IRA, but you’re not sure how or where to get started?

In this article, we’ll walk you through the process and take a look at some good low-cost investments for your Roth IRA once you open it!

Here’s What You Need to Know Before Opening a Roth IRA

Confused about opening a Roth IRA? Don’t be! We’re going to walk you through the process. But first, here’s what you need to know about Roth IRAs in the simplest terms.

A Roth IRA is a tax-free account that you can put in $6,000 a year max if you’re under age 50, or $7,000 if you’re 50 and over.

“A Roth IRA is the most efficient place for you to have money grow for your retirement because the money in it grows tax-free and is spent tax-free,” money expert Clark Howard says.

You can get started on your way to building a more financially secure retirement in just five easy steps. Here’s how to open a Roth IRA…

How to Open a Roth IRA: Table of Contents

1. Determine Your Eligibility
2. Pick a Provider
3. Open Your Account Online
4. Fund Your Account
5. Select Your Investments

1. Determine Your Eligibility

There are income limitations on who can contribute to a Roth IRA, however most people should make the cutoff.

If your tax filing status is single:

  • You can contribute fully to a Roth IRA if you make less than $122,000.
  • If you earn between $122,000-$137,000, you can contribute a reduced amount.
  • You cannot contribute to a Roth IRA if you make more than $137,000.

If your tax filing status is married filing jointly:

  • You can contribute fully to a Roth IRA if you make less than $193,000.
  • If you earn between $193,000-$203,000, you can contribute a reduced amount.
  • You cannot contribute to a Roth IRA if you make more than $203,000.

If you fall in the gray area where you are only allowed to make a reduced contribution, you can figure out how much that is by checking the IRS formula.

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2. Pick a Provider

Money expert Clark Howard likes discount investment houses like the Vanguard Group, Fidelity Investments and Charles Schwab as places for you to open your Roth IRA.

Vanguard

The Vanguard Group is a registered investment advisory based in Valley Forge, Pennsylvania with $5.3 trillion in global assets under management, as of September 30, 2018.

  • Known for its low fees
  • Client-owned structure where the people who own its funds are the owners of the company
  • You can begin investing in select funds with $1,000
  • However, most funds require a minimum of $3,000
  • No physical office locations for customers

Fidelity

Fidelity Investments is a multinational financial services corporation based in Boston, Massachusetts with $2.46 trillion in assets under management as of March 2018.

  • Offers the industry’s first-ever no-fee index funds
  • Known for its low fees
  • You can begin investing with no minimum in many funds
  • However, some funds require a minimum of $2,500
  • Has 10 regional offices and more than 190 financial planning offices for customers
  • See a complete list of office locations here.

Charles Schwab 

This bank and brokerage firm based in San Francisco, California had $3.25 trillion assets under management as of December 31, 2018.

  • Known for its low fees
  • No account minimum to open most accounts
  • More than 300 locations across the country for customers
  • See a complete list of office locations here.

3. Open Your Account Online

Vanguard, Fidelity and Charles Schwab all make it easy to open an account. You can either do this online or in person at a Fidelity or Schwab office. (Remember, Vanguard doesn’t have offices for customers.)

You’ll just need some basic info whether you get started online or at an office:

  • Driver’s license or other photo ID
  • Social Security number
  • Bank routing number and checking or savings account number
  • Employer’s name and address
  • Name, address and Social Security number of plan beneficiary, if applicable

Here are some helpful links to get you started opening your Roth IRA:

Provider Start investing with Get started at this link
Vanguard From $1,000 to $3,000 depending on the fund More info
Fidelity From $0 to $2,500 depending on the fund More info
Charles Schwab $1 More info

4. Fund Your Account

Once your Roth IRA account is set up, it’s time to fund it using the bank account your linked to your newly opened brokerage account. This process may take a day or two at most to move money over.

There are two approaches you can take to funding your account:

  1. Do it all at once. If you have $6,000 available, you can fund your Roth IRA fully in one shot. ($7,000 if you’re over 50).
  2. Make contributions every pay period or monthly. The best way to do this is to automate your contributions so they come directly out of your paycheck.

However, there is one pitfall we should note. Many first-time investors make a common error when they open a Roth IRA account: They leave their funds in a temporary settlement account without actually taking the additional step of investing the money!

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In that case, their money just sits there earning paltry interest in the settlement fund. They miss out on the chance to earn (potentially) bigger bucks in the stock market.

We’ve got a full rundown of this problem and what you need to watch out for here.

5. Select Your Investments

Money expert Clark Howard likes for you to keep the Roth IRA simple. That’s why he recommends target-date retirement funds.

With target-date retirement funds, you select the fund with the year closest to when you want to retire and simply put all your money into it.

Let’s say that’s 2050. You just buy a 2050 fund and then the fund manager automatically adjusts the stocks-to-bonds ratio of your fund as you age. No mess, no fuss on your part.

It’s that easy!

Here are some target-date retirement funds that Clark likes:

Vanguard Target Retirement Funds

  • Investments: A combination of stocks, bonds and cash equivalents
  • Years available: 2025, 2030, 2035, 2040, 2045, 2050, 2055 and 2060
  • Expense: Between 0.13% and 0.15%
  • Minimum investment: $1,000 for target-date retirement funds

Fidelity Freedom Funds

  • Investments: A combination of stocks, bonds and cash equivalents
  • Years available: 2025, 2030, 2035, 2040, 2045, 2050 and 2055
  • Expense: Between 0.1% and 0.75%
  • Minimum investment: $0 for target-date retirement funds

Schwab Target Retirement Funds

  • Investments: A combination of stocks, bonds and cash equivalents
  • Years available: 2025, 2030, 2035, 2040, 2045, 2050, 2055 and 2060
  • Expense: 0.08%
  • Minimum investment: $1 for target-date retirement funds

Meanwhile, if you want to be a little more proactive in selecting what goes into your Roth IRA, Clark also likes these alternatives:

Final Thought

Once you’ve opened your Roth IRA, try to resist the urge to monitor it constantly. Remember, your portfolio will move up and down with the stock market. That’s only normal.

Roth IRA money is intended to be tax-free money that will be spent down the road in retirement. So the best advice is to review your portfolio annually — not every day, week or month.

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But the bigger takeaway here is this: Getting started investing for your future doesn’t need to be hard, difficult or even expensive!

Once you know how to open a Roth IRA, you’re well on your way to building a more financially secure future for yourself and your family.

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