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If you’ve been thinking about saving for retirement, you may have heard of a Roth Individual Retirement Account (IRA).

A Roth IRA lets you save and invest with tax breaks. As long as you keep your money in a Roth IRA, you delay taxes on your investment earnings. If you wait until you turn 59 ½ to take money out and have owned the Roth IRA for at least five years, your withdrawals are tax-free.¹ In other words, you avoid owing tax on most of your investment earnings.

A Roth IRA can go a long way toward your retirement goals, especially if you begin saving at a young age and maximize the tax break over many years. Here’s how to start a Roth IRA account.

5 steps for opening a Roth IRA account

Before you can invest in a Roth IRA, you’ll need to open one first. IRAs are not connected to your work. Instead, you launch your own retirement plan with a company offering these accounts. Here’s how.

1. Verify eligibility

The government sets an income limit cutoff for using a Roth IRA. High earners cannot contribute to these accounts. In 2024, you can use a Roth IRA only if your adjusted gross income (AGI) is below these limits:

  • Single: less than $161,000
  • Married filing jointly: less than $240,000
  • Head of household: less than $153,000²

If you earn too much to use a Roth IRA, check if your job offers a Roth 401(k). This workplace retirement account has the same tax breaks as a Roth IRA. Alternatively, you could open a Traditional IRA. A Traditional IRA gives you an upfront tax deduction for your contributions, though your future retirement withdrawals are taxed.

2. Select your Roth IRA provider

If you’re eligible to open a Roth IRA, decide where to set up your account. Investment brokerage firms, banks, insurance companies, and online fintech companies are possibilities.

As you research your options, consider:

  • Account fees: Look for a company with low to no annual fees for running a Roth IRA.
  • The investment options: Does the company have a good selection of stocks, bonds, mutual funds, exchange-traded-funds (ETFs), target-date funds, and other investments? If you have a specific investment in mind, does the IRA company offer it?
  • The trading costs: What does the company charge when you buy or sell investments? Trading fees have decreased over the past few years, with many companies now offering free trades.
  • Customer service: How will the company support your account? By phone, email, or in-person support? Make sure you’re happy with the options.
  • Investment research and calculators: What tools does the company provide to help you plan your investments?

3. Complete the necessary forms

Your provider will give you the Roth IRA setup paperwork. Most companies allow you to complete the process online. Expect to submit:

  • Your name, address, and contact information
  • Your Social Security Number
  • Your driver’s license or another form of photo ID
  • Your income and employment information
  • The beneficiary who would inherit your account after you pass away

4. Contribute to your Roth IRA

Link your bank account to deposit money into your IRA. Decide how much you’d like to put in for your first investment. From there, you can set up a contribution schedule. Consider adding money every month to build your retirement savings.

The IRS sets annual Roth IRA contribution limits. In 2024, you can save up to $7,000 if you are younger than 50 and up to $8,000 if you are 50 or older.²

5. Pick the investment options

Once you have money in your Roth IRA, you can invest your savings for future growth. Some possibilities include:

  • DIY your portfolio: You can pick any stocks, bonds, and other investments you think would be most profitable.
  • Mutual funds and ETFs: These are professionally managed investment funds. The fund manager builds a portfolio for you and the other investors. Each fund will list different goals, like generating income or focusing on tech stocks.
  • Target-date funds: With these funds, you pick when you want to retire, like retiring in 2050. The fund manager handles the investments to best hit your goal.
  • Working with a financial advisor: A financial advisor could help you assemble the portfolio. The company managing your Roth IRA may provide in-house experts.
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5 reasons for opening a Roth IRA account

Now that you’ve seen how to start a Roth IRA account, you might wonder whether it’s worth doing. There are a few reasons why a Roth IRA is one of the most popular and effective ways to save, especially if you start planning for retirement in your 20s and 30s.

1. Delays taxes on investment gains

If you save money through a regular bank or brokerage account, you owe income tax on your earnings every year. This applies even if you reinvest the money versus spending it. A Roth IRA delays taxes on your investment gains as long as the money stays in the account. You can keep reinvesting the tax savings to build more and more wealth for the future.

2. Builds future tax-free retirement income

Once you turn 59 ½, you can start taking retirement withdrawals from a Roth IRA. Your withdrawals are completely tax-free if you meet two conditions: you’re at least 59 1/2 and it’s been at least five years since your first contribution into a Roth IRA.³ At this point, you don’t owe income tax on your investment gains and keep every dollar in your retirement account. A Roth IRA is especially useful if you think your retirement tax bracket will be higher than now.

3. Available outside of work

Some retirement plans, like a 401(k), are only available through work. You can’t use these plans if your job doesn’t offer one. But a Roth IRA is your account. You can open a Roth IRA on your own to get the same tax breaks as a workplace retirement plan. You also have more flexibility to decide on the investments in an IRA vs. a 401k. You aren’t limited to the options provided by your employer. If a Roth IRA company doesn’t offer the investments you want, you can switch to another that does.

4. Gives some early access to the money

While a Roth IRA is a retirement account, it gives you options for taking money out early. You can withdraw up to what you deposited into the account without owing taxes or penalties but you may need to pay taxes or penalties on any earnings.

How does a Roth IRA work for taking out your gains before you turn 59 1/2? In this case, you owe taxes and a 10% early withdrawal penalty on the gains. The IRS provides some possibilities to take gains out early without the 10% penalty:

  • $10,000 for buying your first home
  • College expenses
  • Disability
  • Health insurance premiums while unemployed
  • Unreimbursed medical bills totaling more than 7.5% of your AGI⁴

5. Creates a tax-free inheritance for your family

If you don’t spend all the money in your Roth IRA, you pick a beneficiary to inherit the account, like a family member. They’ll also be able to take out your contributions tax-free and your investment earnings tax-free, once the account is at least five years old.⁵

What to do after you open a Roth IRA account

Once you’ve opened a Roth IRA account, you’ll need to manage the account and your investments to reach your long-term goals.

Plan your annual contributions

Budget how much you’ll save in a Roth IRA every year. If you can’t max out right away, that’s fine! Aim to save as much as you can. You should also pay attention to the rule changes. Over time, the IRS increases the maximum contribution limit for inflation so you can save more.

Reevaluate your investments

Decide how you’ll monitor your portfolio to make sure it’s delivering. The amount of work depends on your investment strategy. If you build your portfolio, you’ll need to pay more attention to market news during the year to keep your investments on track.

On the other hand, if you use target-date funds or mutual funds, you could check in just once a year. The fund manager takes care of the work for you.

Explore the Saver’s Credit

The Saver’s Credit helps low and moderate-income taxpayers put money aside for retirement. If you qualify, contributing to a Roth IRA would also lower your income taxes. In 2024, you can claim the Saver’s Credit if your income is below these limits:

  • Single: $38,250 or less
  • Married filing jointly: $76,500 or less
  • Head of household: $57,375 or less²

If you qualify, complete IRS Form 8880 with your tax return to get this credit.

Rebalance to safety as you approach retirement

The closer you are to retirement, the less risk you should take with your investments. That’s because you have less time to recover from a big loss. A rule of thumb says to subtract your age from 120.⁶ That’s the maximum amount you should have in stocks versus bonds. For example, a 60-year-old should have no more than 60% in stocks, with the rest in bonds and cash. Target-date funds automatically make this adjustment for you.

The road to retirement

A Roth IRA can be a powerful tool thanks to its tax-deferred investment growth and tax-free retirement withdrawals. The journey starts by opening your account. By finding the right provider, making your first contributions, and setting up your investment portfolio, you’ll be on your way toward building tax-free retirement income.

Consider meeting with a financial advisor during this process. They could help you start a Roth IRA and make the most of your retirement accounts.

If you’re ready to take the next step with your financial plan, check out this beginner’s guide on how to start investing.

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¹ Information from the IRS's "Roth IRAs" as of January 31, 2024: https://www.irs.gov/retirement-plans/roth-iras

² Information from the IRS's "401(K) Limit Increases To $23,000 For 2024, IRA Limit Rises To $7,000" as of January 31, 2024: https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000

³ Information from the Kiplinger's "Two Five-Year Rules for Roth IRAs" as of January 31, 2024: https://www.kiplinger.com/taxes/five-year-rule-on-roth-ira-contributions-and-payouts-kiplinger-tax-letter

⁴ Information from the IRS's "Retirement Topics: Exceptions To Tax On Early Distributions" as of January 31, 2024: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

⁵ Information from the IRS's "Retirement Topics - Beneficiary" as of January 31, 2024: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

⁶ Information from the Morningstar's "Pinning Down Portfolio Rules of Thumb" as of January 31, 2024: https://www.morningstar.com/markets/pinning-down-portfolio-rules-thumb

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