How can I open a Roth IRA? Are there unique rules that govern the opening of this type of IRA that I should stick to? Can anyone open a Roth IRA, or do I have to meet certain age requirements before opening one? In today’s article, I will take you through what the IRA opening process is like so that you can get clear answers to questions such as the ones above. Stick on till the end to find out what it takes to open such an IRA.
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A Roth IRA is a perfect retirement investment vehicle. One pays taxes on their contributions upfront and watches as what is left of their investment compounds so that they can eventually withdraw the funds tax-free. Below are the steps that you should follow to open your IRA:
- Find out if you qualify for a Roth IRA.
- Figure out which type of investor you are.
- Choose a suitable service provider and open your Roth IRA.
- Select the right investments
Find out if you qualify for a Roth IRA
Roth IRAs have their income limits, and this can either reduce or take away your ability to open and contribute to this type of IRA. In 2021, the contribution limit was $6000 (or $7000 for those aged 50 years and above), for all those who had a modified adjusted gross income of less than $140,000 for the single filers, or $280,000 (for the joint filers).
If your current income exceeds these limits, then your only option is to open a backdoor Roth IRA, through which you get to convert your funds from a traditional IRA.
Decide what type of investor you are
Now that you have confirmed that you are eligible to open a Roth IRA, it is now time to consider your investing approach preferences.
- If you are a “do-it-yourself” investor, you should choose a brokerage – this option allows you to open a Roth IRA through an online broker so that you can then choose your preferred investments. This process is simpler than you’d think, and it is quite easy to build your portfolio with only 3 or 4 mutual funds. When choosing the online broker to work with consider the trade commissions as well as the investment fees/investment ratios.
- If you are an investor who would rather have their assets managed for them, then a robo-advisor is the way to go – Robo-advisors are online services that are created in such a way that they can help anyone build and maintain a diversified portfolio. All that is required of you is that you pay a small fee for this service, which happens to be way lower than the fees that you pay when being served by human advisors.
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Choose your Roth IRA service provider, and open your Roth IRA
Depending on the type of investor you are, you will have different considerations to make. Here are some of the main ones:
Choosing the right Roth IRA for you as a “do-it-yourself” investor
As already highlighted, if you would prefer picking your own investments to having a robo-advisor do that for you, then turning to an online broker is the way to go. The best online brokers will present you with a list of many low-cost investments to choose from, such as ETFs and mutual funds. They will also offer you sufficient and efficient retirement planning tools, reliable customer service, as well as the most reasonable account minimums and fees (for the quality of services offered). They offer all this whilst ensuring that you have total control over the manner in which you choose to invest your retirement funds.
Choosing the right Roth IRA if you prefer having someone else manage your investments for you.
For the people who are trying to invest for retirement but do not want to worry about what will go into their portfolio, then robo-advisors should do the job. Robo-advisors hire investment experts to help with the selection of the most suitable assets for different investors. Some robo-advisors create portfolios based on the level of risk that an investor can stomach. If you are an aggressive investor, you’ll end up getting high-risk, high-income potential assets allocated to your portfolio. As a conservative investor, you can only expect to have low-risk assets in your portfolio.
The investors who go with this option only have to open their Roth IRA, link it to their bank account, and follow the steps the service provider outlines to build their portfolio. The robo-advisor then proceeds to purchase the most suitable investments and manages the account.
Most robo-advisors in the market also offer services that help people maximize their savings, e.g.
- Goal-setting and tracking tools.
- Tax bill reduction strategies
Select your investments
The last step in the process is deciding where to invest the funds in your Roth IRA. For the purpose of clarification, a Roth IRA is an account, not an investment in itself. Making the contributions to your account is just one step, hence anyone who wants to build their money must invest their money.
Once you figure out the investments that are right for you (as a Do It Yourself investor), then you should highly consider setting up automatic fund transfers. This helps you avoid the hassle of trying to initiate transfers each month, and also ensures that you get to save regularly. You will also find that some brokers waive their initial deposits for those who commit to making automatic transfers each month.
You should, however, that you do not over-contribute to your IRA. Contributing more money than what is set as the IRS limit only attracts penalties.
N.B.: The contribution limits are for all your IRAs combined. If you, therefore, have both a traditional and a Roth IRA, then you should know that the limit covers the total amount you contribute to the two accounts.
Those heading to their retirement years also have the choice to open a self-directed IRA, since it offers more freedom and investment choices. See our top-recommended self-directed IRA service providers (invest in gold and silver).
Frequently asked questions on “ How to open a Roth IRA?”
1. When can you make contributions to a Roth IRA?
You can make contributions to your Roth IRA at any time of the year, during the year. It is up to you to make plans on how you will make the contributions of your preferred amount of money ( up to the set limits), within the tax year ( or before your next due date for filing returns).
2. What happens when I contribute too much to my Roth IRA?
Upon opening your Roth IRA, you are expected to abide by the rules set by the IRS, including those about contribution limits. A 6% excise tax is charged on any excess amount that you contribute to your IRA. For the purposes of determining which amounts can be viewed as excess contributions, the IRS treats any contributions that are withdrawn on or before the due date for the filing of tax returns as amounts not contributed. Note that this treatment only holds if you also withdraw the earnings on your contributions.
3. From which plans can I rollover funds into my Roth IRA?
You are allowed to roll over the eligible amount of money into your Roth IRA, from any of the following plans:
- Any employer’s qualified pension ( including a 401(k) plan).
- Annuity plan
- 457 plan
Any amount that you roll over is subject to the same rules that apply to Traditional to Roth IRA conversions.
4. How do I know if I am eligible to contribute to a Roth IRA?
Generally, you can open and contribute to a Roth IRA if you have taxable income, and your modified adjusted gross income ( MAGI) happens to be less than:
- $208,000 – for the married couples who file jointly, or for qualifying widows or widowers.
- $140,000- for all single or married people filing separately.
- $10,000 – for the married people who are filing separately, and were living with their spouse in the year of filing returns ( and opening the Roth IRA)
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That will be all for this post in which I have answered the question, “How can I open a Roth IRA.” I hope that it was educational and that it will guide you on how to open your account today. Let me know if you have any questions concerning the topic, or you would need help opening your self-directed IRA as well- drop your question in the comments section and I’ll get back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!
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