Starting a Roth IRA Is Easier Than It Seems
- Make sure you are eligible to start a Roth IRA. Your income and tax filing status will determine how much you can contribute.
- Pick where you want to start your Roth IRA. Companies from full-service financial advisors to discount brokerages offer Roth IRA accounts
- Choose your investments. You can pick almost any investment for your Roth IRA.
Starting a Roth IRA isn’t nearly as hard as it seems. Opening a Roth IRA can be one of the best retirement planning decisions you make, because your money grows tax-free, and you can withdraw it tax-free when you retire. Some of the most common questions about opening a Roth IRA are:
- Am I eligible for a Roth IRA?
- Where should I start a Roth IRA?
- How do I choose my investments?
- What is the deadline for opening a Roth IRA?
Most people are eligible to start a Roth IRA. But your eligibility for a Roth IRA may be affected by your income. If you earn too much, you may not be able to contribute. The chart below shows the limits for 2016.
For 2016, you can contribute $5,500, in total, to all your IRAs. You can contribute $6,500 if you are older than 50. The contribution limits for IRAs typically change every year.
|If your filing status is …||And your modified AGI is …||Then you can contribute …|
|Married filing jointly||< $184,000||up to the limit|
|>$183,000 but <$193,000||a reduced amount|
|Married filing separately but you live with your spouse||<$10,000||a reduced amount|
|Single, head of household, or married filing separately and you did not live with your spouse|
|<$117,000||up to the limit|
|>$117,000 but <$132,000||a reduced amount|
If you must reduce your contribution based on the chart above, you can find the formula for figuring how much you can contribute here, on the IRS web site.
If you make too much to contribute directly to a Roth IRA, you may be able to do a “backdoor” Roth IRA conversion.
Almost all investment companies, from banks to financial advisors, offer Roth IRA accounts. If you have an existing Traditional IRA somewhere, the same company can probably open a Roth IRA for you.
Most experts suggest asking these questions when you consider where to open your account:
- Is there a fee to open or maintain the account?
- Does it offer the kind of customer service you expect, whether it is online or by telephone?
- Does the company offer the kinds of investments you want, from ETFs to target-date funds to actively managed funds?
- How much does it cost to make a trade, if you plan to buy and sell frequently in your account?
Some companies that offer Roth IRA accounts are:
- Fidelity: Fidelity’s Roth IRA accounts are free and the company offers one of the widest selections of investment options, including target-date funds.
- E*Trade: E*Trade, adiscount online brokerages, offers very low trading fees and access to many different investment products.
- Merrill Edge: Merrill Edge offers a connection with a bank — Bank of America — which can make regular automatic transfers into your Roth IRA easy. It also has low-cost trades and the ability to work with financial advisors.
There are three different ways to approach buying investments in your Roth IRA. You can design your own portfolio by picking a selection from thousands of options available at most banks and brokerages. You can buy a target-date or lifecycle fund. You can also consult a financial advisor, one that works with your bank or brokerage, or an independent advisor.
If you are going to design your own investment portfolio within your Roth IRA, the most important idea is to pick your investments based on your comfort level. The biggest mistake investors make is buying and selling too frequently, especially because they are reacting to the market.
Most experts recommend buying 2-6 different mutual funds or exchange-traded funds, some that have stocks inside them, and some that have bonds, and keeping a small portion of your account in cash or cash equivalents, such as money market funds. Look for funds that have expense ratios of less than .5%. That fee is in addition to the fee you may pay to the bank or brokerage for the account itself.
Another good option is target date funds or lifecycle funds. They are designed to automatically diversify your investments and adjust over time, so that you have less risk of a large drop in value as you near retirement. Some examples of good fund families are Fidelity’s Freedom Funds or Vanguard’s Target Date Funds. If you buy a target date fund, remember it is designed to take the place of your entire retirement account. It’s best to buy just one.
Some people hire investment advisors to help them pick investments in their Roth IRA accounts. Others rely on guidance from the company that is providing them the account.
The deadline for opening a Roth IRA account and making contributions is April 15 of the following tax year. For instance, the deadline to make contributions for the 2016 tax year is April 17, 2017.