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A Roth IRA could be just what you need to reach your retirement goals. But how do you figure out if you need one? And what are the best steps to follow to start a Roth IRA?

This guide will answer those questions by providing step-by-step instructions on how to open a Roth IRA as well as information about the benefits of this account. Keep reading to learn more.

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What is a Roth IRA?

A Roth individual retirement account (IRA) is a type of retirement account with special tax benefits. It was named after the late Delaware senator who pioneered it, William Roth.

The big advantage of a Roth IRA is that you can grow your money without incurring any taxes. You can also withdraw your contributions at any time, without penalty, since Roth IRAs are funded with post-tax income.

If you want to withdraw earnings from your Roth IRA account without penalties, however, you need to be at least 59 ½ and the account must have been open for at least five years. There are special cases in which you can withdraw earnings without penalties, such as to fund the purchase of a first home or cover educational expenses.

How does a Roth IRA work?

Roth IRAs function largely the same as any other investment account for retirement, with a few key differences. You can put money into your Roth IRA up to the annual limit set by the Internal Revenue Service and invest it in equities, bonds, exchange-traded funds (ETFs) and even cryptocurrency.

If you decide to sell some of those investments and earn a profit, you would typically need to pay capital gains taxes on the amount you earned. But that’s not the case for Roth IRAs. These accounts allow you to keep all of your gains without paying taxes on them. As long as you wait to withdraw the funds until you meet the age threshold, you won’t have to pay taxes then, either. This can result in substantial savings.

The main downside of a Roth IRA is that any money you earn through investments could be subject to penalties if you try to withdraw them before reaching the two thresholds: your age (59 ½) and tenure of the account age (five years).

Note that Roth IRA earnings are not the same as contributions. You’re free to withdraw any money you’ve contributed to a Roth IRA at any time without penalty. The earnings you make through investments on those contributions are subject to these rules.

Roth IRA vs. traditional IRA

A Roth IRA is just one type of retirement account you may wish to use. Another common option is the traditional IRA. The two accounts have a few differences that are worth exploring:

Roth IRA Traditional IRA
Best for Tax-free future withdrawals Immediate tax benefits
Contribution types allowed After-tax Both after-tax and pre-tax
Are contributions tax deductible? No Yes (subject to some limitations)
Is everyone eligible? No, only those who earn under the current income threshold Yes
How are withdrawals taxed? No taxes or penalties after five years and age 59 ½ No penalties, but taxed as current income

The biggest thing to note is that Roth IRAs offer tax savings in the future, whereas traditional IRAs offer tax savings upfront. This is why the common advice is to use a Roth IRA when you expect your taxes in retirement to be higher than they are now, but a traditional IRA when you expect taxes to be lower in retirement.

You’re free to open both a Roth IRA and a traditional IRA if you wish. Your annual contribution limit will still be $6,500 (or $7,500, if you’re over 50) across both accounts. These are the limits for 2023. In other words, you can’t contribute $13,000 to the accounts just because you open up multiple account types.

How to open a Roth IRA

Now that you know what a Roth IRA is and why you may wish to open one, let’s review step-by-step instructions for doing so. Here’s what you need to know.

1. Ensure that you meet the eligibility requirements

A good first step is to review the eligibility requirements for Roth IRAs. The major one to consider is Roth IRA income limits. These vary from year to year and are based on your modified adjusted gross income (modified AGI).

As of 2023, you can contribute the full amount to a Roth IRA if your modified AGI is under $138,000 or $218,000 for couples. Your maximum contribution will decrease if you earn more than this, up to the maximum income of $153,000 for a single person or $228,000 for couples. If you earn more than these figures, you can’t contribute to a Roth IRA and should look into alternative options. There is no minimum amount required to open a Roth IRA. As long as your earnings come in under the income threshold, you should be eligible to create one of these accounts.

2. Choose where to open a Roth IRA

Once you've confirmed your eligibility, you can begin thinking about where you want to open a Roth IRA. To help you get started, we've highlighted seven of the best Roth IRA accounts.

Of course, you may wish to create your account at the institution that you’re already using. Doing so will simplify your account management and may allow for you to complete a simplified 401(k) rollover to open your account.

It’s worth researching other providers to see which institution is the best fit for you. Some companies may give access to more investment opportunities than others, and you may have preferences for the online account management and trading platforms of certain companies.

3. Complete the online application

When you've chosen your financial institution, it's time to fill out the online application for opening a Roth IRA. You'll typically be asked to provide personal details and information about your income, including:

  • Social Security number, address and date of birth
  • Employer, supervisor and job title
  • Annual income

As long as you meet the income requirements, you shouldn't have any issue getting approved to open a Roth IRA. Most institutions will allow you to fund your account immediately after approval.

4. Decide how you want to invest in your Roth IRA

There are several ways to invest in a Roth IRA, including:

Doing it yourself through a brokerage

If you’re confident in your ability to invest wisely, then you can purchase equities, bonds and other financial assets through a brokerage. This process is often as easy as navigating to your brokerage’s trading platform, selecting an asset and purchasing it with the funds in your Roth IRA.

Using a robo-advisor

Robo-advisors provide automated financial advice with minimal human oversight. They do so by using a variety of algorithms and mathematical rules to find the most promising investment opportunities for your goals. You may wish to use a robo-advisor if you want help making investment decisions but don’t want to pay higher fees for a human financial advisor.

Remember that these robotic advisors carry higher fees than making your own investment choices, although the fees are lower than they would be when working with a human advisor. They may have limited investment choices.

Consulting a financial advisor

If you want personalized investment advice from an expert, then connecting with a financial advisor is the best way to get it. They can help you find the right investments for your goals and manage your money more effectively.

Aa financial advisor could help you consider the top reasons to roll over your 401(k) to an IRA while also helping you make more informed decisions about where to place your money. Working with a financial advisor will generally be more expensive than doing it yourself or leveraging AI-assisted tools.

5. Set up a regular contribution schedule

To maximize the benefit of using a Roth IRA, it's best to automate contributions by setting up a regular contribution schedule. You can use an online Roth IRA calculator to determine how much money you'll need to contribute annually in order to reach your financial goals. A common strategy is to divide the maximum contribution amount by 12 and set up monthly deposits to your account. Remember that there is a hard cap on the amount that you can contribute to these accounts each year.

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When can you withdraw from a Roth IRA?

You're free to withdraw contributions from your Roth IRA whenever you want. However, if you do so without meeting certain criteria, you'll incur penalties and fines that may offset the benefits of opening one of these accounts in the first place.

You can withdraw contributions that you’ve made to your Roth IRA without any penalties any time you want. But if you want to withdraw earnings you’ve made through the account, then you will need to be at least 59 ½ years old and your account must have been open for at least five years to avoid penalties.

Of course, there are some exceptions to these rules. You may be able to withdraw funds fee-free from a Roth IRA early if you do so for a covered reason, which includes the following:

  • Purchasing or rebuilding a home
  • Paying for college expenses
  • Covering unreimbursed medical costs
  • Paying taxes that you owe to the IRS
  • Covering expenses related to birth or adoption

Roth IRAs are designed to be long-term retirement accounts that you don’t touch unless you absolutely need the funds. If you think that you'll need to withdraw money from your retirement account for a non-covered reason at some point, you may wish to look into alternative account options.

How much can you contribute to a Roth IRA?

You can contribute up to the maximum amount set by the federal government on an annual basis. That maximum is $6,500 for those under 50 and $7,500 for people 50 and older in 2023. If you plan to allocate more than this to your retirement, you’re free to do so in other account types, such as a 401(k) or standard investment account — you just won’t enjoy the same tax benefits you receive from your Roth IRA.

How does a Roth IRA grow?

Roth IRAs grow in two ways. You can increase your account value by continuing to make regular contributions and by investing your funds in assets such as equities, bonds, cryptocurrency and money market funds.

You can use your Roth IRA account balance to make investments the same way that you use other accounts. However, you want these funds to be available when it’s time to retire, and if you partake in riskier investment opportunities, it could potentially jeopardize your future goals.

Talk to a financial advisor about growing your Roth IRA through an investment strategy that aligns with your risk tolerance. They can listen to your goals and make personalized asset recommendations, whether that’s taking a riskier approach when you’re younger or a more conservative one as you approach retirement age. You may also wish to research the best self-employed retirement plans if you work for yourself.

Summary of Money's guide to opening a Roth IRA

Roth IRAs can help you earn tax-free income through your retirement investments. If you’re interested in a Roth IRA, you should make sure you meet the income eligibility requirements, which are currently capped at $153,000 for individuals and $228,000 for couples. As long as you meet that requirement, you should have no problem opening a Roth IRA online after a simple application.

Keep in mind that you will need to have the account open for at least five years and be at least 59 ½ years old to withdraw earnings from the account without incurring penalties and taxes (except in special circumstances). You can withdraw contributions you’ve made to the Roth IRA at any time.

Additionally, if you want your Roth IRA account to grow, you'll need to continue making contributions and investing the funds. It’s always a good idea to consult with a financial expert before making any financial decisions that could impact your account.

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