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- You may not be eligible to open or contribute to a Roth IRA if you make too much money.
- If you are eligible, you can open a Roth IRA by defining your investing strategy, choosing a provider, and furnishing any necessary paperwork.
- You can invest Roth IRA funds in a variety of security types, like bonds, stocks, and mutual funds.
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Roth IRAs are one of the many tools you can use when planning for retirement. These strategic accounts allow you to contribute post-tax earnings and then invest in a wide variety of securities, including stocks, bonds, ETFs and more. Once you retire and begin withdrawing funds, those withdrawals are non-taxable – a nice perk if you're on a limited income or are in a high tax bracket.
If you're interested in using a Roth IRA to build wealth for your retirement, here's what you need to know.
Before you open a Roth IRA
Setting up a Roth IRA is a fairly simple process, but there are a few steps you should take before moving forward with one. The first? Make sure you're eligible – both to open one and contribute to it.
Confirm if you're eligible
Most people are eligible to open a Roth IRA. The only thing you need to qualify is what the IRA calls "taxable compensation" – meaning any earnings subject to federal taxes (even those you get from self-employment). Commissions and alimony payments can also qualify.
If you don't have earned income but have a spouse who does, you can contribute to their account – you just won't be able to open your own.
Make sure your income qualifies
However, you can earn too much overall to contribute to a Roth IRA. If you make more than $140,000 as a single person or $208,000 as a married couple filing jointly, you can't contribute to a Roth IRA at all.
Here's a breakdown of the IRS' current Roth IRA contribution limits:
| Tax filing status | Modified adjusted gross income | Contribution limit |
| Single, head of household or married filing separately and you do not live with your spouse | Less than $125,000 | Up to $6,000 to $7,000 per, depending on age |
| Between $125,000 and $140,000 | A reduced amount (use this worksheet to determine how much) | |
| $140,000 or more | Cannot contribute | |
| Married filing separately and you live with your spouse | Less than $10,000 | A reduced amount (use this worksheet to determine how much) |
| $10,000 or more | Cannot contribute | |
| Married filing jointly or widow/widower | Less than $198,000 | Up to $6,000 to $7,000 per, depending on age |
| Between $198,000 and $208,000 | A reduced amount (use this worksheet to determine how much) | |
| $208,000 or more | Cannot contribute |
1. Decide how you want to invest
Once you've confirmed you're eligible for a Roth IRA, you'll need to consider what investing strategy you'll want to take. Do you want to be a hands-on investor, choosing your investments and managing your portfolio directly? Or would you rather take a hands-off approach and let the professionals do the work for you?
If you're new to investing or not too keen on research, a robo-advisor can be a smart move. These are online, technology-based solutions that build portfolios based on your risk tolerance, goals, and other data. They come with several perks, like automatic portfolio rebalancing and lower fees.
"Robo-advisor funds are a great way for beginner Roth IRA investors to get access to advisor-managed funds at a low cost," says Adam Bergman, founder and CEO of IRA Financial Group.
If you're interested in a more active approach, a brokerage might be your best choice. With a brokerage, you can build and manage your entire portfolio yourself, usually using an online dashboard or app. It requires more research and investing know-how than other options, and in some cases, may come with higher fees, too. The benefit is there are often more investments to choose from, plus access to real-life investing professionals if needed.
2. Choose your provider
There are many institutions that offer IRAs, including banks, credit unions, online brokerages, mutual fund companies, and financial-planning firms.
When deciding which to go with, consider the types of investments they offer. Are you looking for a target-date fund? Stocks and bonds? ETFs? Every institution will offer something a little different, so make sure you choose one that aligns with your goals.
You should also consider the fees an institution charges - be they maintenance fees, trading commissions or transaction fees. Knowing a provider's required minimum balance is important, too.
Just want the most affordable option? Search for providers who offer no transaction fees, low commissions, and a variety of low-cost investment vehicles, like index funds, for example. Some institutions may even offer sign-up bonuses if you're rolling over a large account balance.
3. Provide paperwork
After you've chosen a provider, it's time to actually set up and open your account. This typically requires a little paperwork, but many times, it can be done online. You can also open your account in person with a broker or banker.
The exact paperwork you'll need will vary by provider and choice of funding, but here's a quick glimpse of what you'll typically be asked for when setting up your account:
- A form of government-issued ID (driver's license, passport, etc.)
- Personal information, including your name, phone number, address, date of birth, and Social Security number
- Your preferred contribution method
- Information regarding your rollover account (if you want to fund the account with money from a different IRA, 401(k), or another retirement account)
- Banking information (if you want to fund the account with electronic transfer)
You'll also be asked to provide information on your beneficiaries, or the people who will inherit your IRA if you die.
"The IRA beneficiary form will require the IRA owner to indicate a 'primary' and 'contingent' beneficiary to their IRA in the case of death," Bergman says. "The 'primary' beneficiary is the first party or parties that will receive the IRA upon the IRA owner's death, whereas a 'contingent' beneficiary or beneficiaries would only receive the IRA assets if all the primary beneficiaries are no longer alive."
After you've opened your account
Once your account is up and running, you can begin funding the account and investing for retirement. You will also want to set up a regular contribution schedule to ensure your retirement goals stay on track.
Select your investments
Roth IRAs allow you to invest in all types of securities and financial instruments. As Ami Shah, Certified Financial Planner and co-founder of Steward, puts it, "Unlike a 401(k), you'll have a wide range of investment options. I suggest to clients your investments should match the goals that you're using this vehicle for - in this case, a long-term retirement and an on-time horizon."
Here are just a few of the investments you can choose from:
- Stocks, which allow you to purchase ownership stakes in publicly traded companies
- Bonds, a form of debt security often considered one of the safest types of investments
- Mutual funds, including index funds and target-date funds
- ETFs, or exchange-traded funds, which are pools of securities you can buy like stocks
- Alternative investments, like real estate, gold, silver, and cryptocurrency
When selecting your investments, you'll want to take into account your risk tolerance and how far away you are from retirement. Generally, the further out you are from retiring, the more risks you'll likely be able to take. Bonds tend to be one of the least-risky investment options, while stocks are a bit more volatile.
You should also be sure to diversify your portfolio. By spreading your investments out across different security types and industries, you protect yourself from major loss should the market change. If you're not sure how to go about choosing your investments or diversifying your portfolio, talk to a broker or financial planner who can point you in the right direction.
Set up your contribution schedule
You already know the contribution ceilings for a Roth IRA, so now it's time to set up a contribution schedule to ensure you max those limits out, if possible.
"The key is to maximize one's annual contributions," Bergman says. "Whether you make weekly, monthly, or yearly annual IRA contributions, the objective should be to make the highest amount of annual IRA contributions."
You can technically contribute to your account (for a single-tax year) anytime before or on tax filing day. So for this year, you'd have until April 15, 2022, to max out your 2021 Roth IRA contributions. Keep this date in mind, and then work backward, determining when you can contribute (and how much each time) based on your budget and household contribution limit.
The financial takeaway
A Roth IRA can be a valuable tool in your retirement planning arsenal. Fortunately, setting one up - and contributing to one - is fairly simple.
If you need help determining what type of investing strategy, institution, or securities are right for your Roth IRA, talk with a financial planner or broker. They can help you determine the best options for your goals and budget.