When it comes to IRAs, there are two main types to be aware of: traditional and Roth. Both are great to explore if you don’t have an employer-sponsored retirement account; however, the tax breaks work in different ways. Traditional IRAs are not taxed upfront, while Roth IRAs are taxed up-front. While both methods are popular, you should evaluate which option is best for your unique situation.
Why open a Roth IRA?
A Roth IRA has a few key differences from traditional IRAs:
- There are no age limitations. You can keep up contributions for as long as you’d like even as you’re well into retirement.
- You don’t have to start withdrawing at 70 and a half years of age; you can wait until you’re older.
- Your income determines your eligibility.
If you want to contribute to an account for as long as you’d like, a Roth IRA is a good idea. Feeling restricted by the age limit may push you away from the idea of a traditional IRA.
Income restrictions could scare you off, but if you make less than $137,000 as a single filer or $203,000 as a couple filing jointly, you qualify for a Roth IRA.
Traditional IRAs earn you a tax break the year you make a contribution, which could be a major deciding factor for you. With Roth IRAs, however, you don’t get a break when you put money in, but you will when you take money out.
How to open a Roth IRA in 5 steps
If you’re ready to start your Roth IRA, there are a few steps you’ll need to take.
1. Determine your eligibility
Your income is your biggest determining factor for eligibility. If you make more than $137,000 or you and your partner earn more than $203,000, then you won’t qualify. But even if you’re close to those figures, you can still contribute a reduced amount.
If you earn less than $122,000 independently or less than $193,000 filing jointly, you are free to contribute the full amount for IRAs.
If you earn too much for a Roth IRA, consider alternative investment options.
2. Determine your investment style
Are you ready to take big risks to earn some big rewards? Or do you like to play it safe and earn with less risk? Your investment strategy should be catered to your personal preference and investment comfort level.
If you like to watch your investments every chance you get, an online stock broker like TD Ameritrade or Charles Schwab may be a good choice for you. Try to find a brokerage firm with low or no account minimums so you can start immediately contributing and growing your investments. It’s also important to consider trading costs — the costs can add up quickly when you’re charged a certain percentage or dollar amount per transaction.
If you prefer to take a hands-off approach, you may want to consider a robo-advisor like Wealthfront or Betterment. You’ll complete a questionnaire that creates your investing profile and portfolio. With this approach, you’ll also want to look for low or no account minimums and low fees.
3. How to choose where to open a Roth IRA
There are plenty of places to put your money and lots of companies are vying for your business. Here are a few questions to ask yourself before opening a Roth IRA:
- How involved do I want to be? A robo-advisor is a good idea if you want your money to handle itself. If you want to watch it like a hawk, try an online brokerage.
- What are the extra costs? You’ll be hard-pressed to find a company that doesn’t apply extra or hidden charges for their services. But the more fees you have, the less money you can apply to your investments.
- How much can I contribute? All IRA contributions — both Traditional and Roth — are capped at a combined $6,000 annually for 2019. If you have more money to invest, you might want to try a Roth IRA along with a separate, low-risk investment like a Certificate of Deposit (CD).
Once you have an idea of what kind of investment style you want to adopt, you can choose a company that is most in line with your style.
4. Select your investments
Roth IRAs can consist of any sort of investment you want, like stocks, bonds and mutual funds. With robo-advisors, it’s usually a mix of a bunch of different kinds of investments so you have a well-rounded, diversified portfolio. It’s wise to maintain a diversified portfolio because putting all your money into one stock or one kind of investment can hurt you if the company tanks.
Make sure you have enough saved up for investments that are separate from other financial obligations, like your emergency fund. Once your emergency fund is squared away and your debt is handled, you can start to use your extra cash to invest. Investment money shouldn’t be taking the money you otherwise need to use.
But investing doesn’t end when you open an account. You should try to set up a contribution schedule to consistently add to your investment account. A good starting point is 5% to 10% of your net income. If that’s not doable, try to make auto-contributions every paycheck, month or quarter so your account is always growing.
5. Monitor your growth
IRAs and other retirement investment accounts are good ways to save for the long term. If a company is underperforming or the stock market takes a dip, don’t fret. The market has a way of working itself out in the long run.
But that doesn’t mean you should ignore it completely. Analyze your account every year. The time of year doesn’t really matter, but it might be helpful to schedule it with something like the beginning of the year or around a specific holiday. You might not need to make any changes, but you may feel like it’s time to be a little more conservative or risky based on your updated preferences. You’re probably not the same person you were a year ago.
Don’t fret if you’re still in the research stages of opening a Roth IRA. Look into companies that are most in-line with your investment preferences and choose investment types you’re comfortable with. You want your money to grow over a long time, so try to find a place where you’ll be happy for years to come.