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How to Open a Roth IRA

It takes just a few simple steps to open a Roth IRA and start saving for retirement.

Written by Jacqueline DeMarco / July 6, 2022

Quick Bites

  • A Roth IRA is a retirement account that allows you to make tax-free withdrawals on earnings.
  • There are income limits that determine who can qualify for a Roth IRA.
  • Contributing regularly to a Roth IRA is a great tool in saving for retirement.

A Roth IRA is an individual retirement account that you can use to save for the future while enjoying tax breaks. You can contribute to a Roth IRA with post-tax dollars and won’t have to pay any taxes on earnings when you withdraw them as long as you meet certain rules surrounding when you can make a distribution.[1]

If you’re considering opening a Roth IRA, keep reading to learn how you can open this type of account and how it works.

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Inside this article

  1. How to open a Roth IRA
  2. Where to open a Roth IRA
  3. Who can open a Roth IRA?
  4. How much to open a Roth IRA
  5. How to choose your investments
  6. Contributing to your Roth IRA
  7. FAQ

How to open a Roth IRA

While all Roth IRA providers will have their own unique process for opening this type of account, you can generally expect to encounter the following steps.

  • Choose a provider. Shop around to see which providers can offer you the best services for the lowest fees.

  • Choose your account type. In this case, you’ll be choosing a Roth IRA, but if you don’t qualify for a Roth IRA because you earn too much, you can choose to open a traditional IRA instead.

  • Open the Roth IRA. You will need to fill out some paperwork to officially open your Roth IRA. If you don’t already have an account with the provider, you will also need to open an account.

  • Fund the Roth IRA. A lot of IRA providers require a minimum deposit in order to open the account. After making this initial deposit you’ll need to choose how you want to continuously fund your account. You can have money automatically withdrawn from your savings account or paycheck or you can also choose to make a lump sum deposit at the end of the year.[2]

Where to open a Roth IRA

It’s possible to open a Roth IRA through a variety of different financial institutions, including but not limited to:

  • Banks

  • Credit unions

  • Investment brokerages

  • Mutual fund providers

Who can open a Roth IRA

Whether or not you qualify to contribute to a Roth IRA depends on your income.

“A single taxpayer with annual Modified Adjusted Gross Income (MAGI) income under $129,000 can open and contribute up to $6,000 per year to a Roth IRA,” David Zavarelli, a Certified Financial Planner with LPL Financial, says. “If they are over 50 they can contribute up to $7,000. If their MAGI is above $129,000 and below $144,000, a lesser contribution can be made due to IRS phase-outs.”

Tip

Modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income (AGI) plus additional items like exempt or excluded income and certain deductions. The IRS uses your MAGI to determine your eligibility for certain deductions, credits and retirement plans. MAGI can vary depending on the tax benefit.[6]

If you’re married, the allowed MAGI amount changes. For married couples the MAGI limit increases to $204,000 and they can contribute a reduced amount for between $204,000 and $214,000. If the couple’s MAGI is over $214,000, they can’t contribute directly to a Roth IRA.[3]

If you don’t earn an income, you won’t qualify to contribute to either a Roth IRA or Traditional IRA.[4]

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How much do I need to open a Roth IRA?

“Conceivably you can open a Roth IRA with any dollar amount,” Zavarelli says. “It all depends on the minimums that your chosen financial institution has.”

As briefly noted earlier, some Roth IRA providers have minimum contribution amounts. This isn’t a guarantee, but either way you’ll want to contribute some money to get the savings ball rolling.

How to choose your investments

Contributing money to your Roth IRA and then walking away isn’t going to help you grow your retirement savings. You need to choose how to invest your contributions.

Choosing investments can be overwhelming, but Zavarelli outlined a way to make it easier to choose investments that can meet your goals.

“It is best to select a diversified approach that is appropriate for your age,” Zavarelli says. “A great way to do that is to select an age-based or target date fund. You would select the target date fund that is closest to the year that you might retire and you would put your full contribution into the fund.

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“The money manager then maintains a level of risk that is appropriate for someone your age and makes adjustments as necessary. It is essentially cruise control investing.”

Contributing to your Roth IRA

So, how often should someone contribute to their Roth IRA if they want to make solid progress towards saving for retirement?

“You should aspire to max out your allowed contribution, but what is most important is to just get started,” Zavarelli says. “A great way is to set up monthly contributions from your bank account. If you can afford it, set up monthly contributions of $500 to fully fund the Roth IRA. If you can’t afford that, do what you can and then increase it little by little over time.”

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If you can’t afford to contribute $500 a month, determine how much you can afford to contribute annually and then divide that amount by 12 (or however many months are left in the year) to calculate how much you need to set aside each month.

That way, you won’t have to pull out thousands at once out of your savings at the end of the year. If you want to have your contributions come directly from your paychecks, you can choose to divide your annual savings goal by 24 to account for the two paychecks you generally receive on a monthly basis.

All of that being said, if you didn’t max out your contributions by the end of the year and you have some money to spare, making a large lump sum contribution is a great option.

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FAQ

What is a catch-up contribution?

Only people over the age of 50 can make a catch-up contribution. With a catch-up contribution, they can contribute $7,000 a year to their Roth IRA instead of $6,000. This rule can help those who are getting closer to retirement save more.

Article Sources
  1. “What Is a Roth IRA, and Is It Right for Me?” Experian. Aug. 18, 2021. https://www.experian.com/blogs/ask-experian/what-is-a-roth-ira/
  2. “How to Open an IRA in 3 Easy Steps” Experian. Sept. 18, 2021. https://www.experian.com/blogs/ask-experian/how-to-open-ira/
  3. “Amount of Roth IRA Contributions That You Can Make for 2022” IRS. Nov. 5, 2021. https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022
  4. “Ask Merrill” Merrill Edge. Oct. 15, 2021. https://www.merrilledge.com/ask/retirement/can-i-contribute-to-an-ira-in-retirement
  5. “Issue Snapshot - 401(k) Plan Catch-up Contribution Eligibility” IRS. Oct. 26, 2021. https://www.irs.gov/retirement-plans/401k-plan-catch-up-contribution-eligibility#:~:text=A%20catch%2Dup%20contribution%20is,highly%20compensated%20employees%20(HCEs).
  6. “What is modified adjusted gross income (MAGI)?” HR Block. https://www.hrblock.com/tax-center/income/other-income/modified-adjusted-gross-income/#:~:text=Modified%20Adjusted%20Gross%20Income%20(MAGI)%20in%20the%20simplest%20terms%20is,depending%20on%20the%20tax%20benefit.

About the Author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline has worked with more than two dozen financial brands, including LendingTree, Capital One, Bankrate, Student Loan Hero, and Northwestern Mutual, providing thoughtful content to give readers insight into complex topics that they likely didn’t learn in school.

Full bio

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