- Most people can open a Roth IRA easily with the help of a bank, brokerage or financial advisor.
- There are a handful of steps in the process, from making sure you are eligible to picking the firm and investment choices, to setting up your contribution schedule.
- Once the account is open, maintaining it requires very little effort.
Roth IRAs are one of the best ways to save for retirement. You aren’t taxed on your investment returns over the years, and you can withdraw the money tax-free when you retire. Initiating your account is an easy process. These are the steps to follow when you first open a Roth IRA.
- Make sure you are eligible.
- Decide where to open the account.
- Send in paperwork or open your account online.
- Make your investment decisions.
- Set up your monthly or annual contribution schedule.
- Check on the account at least once a year.
Most people are eligible to start a Roth IRA. But if you make more than $199,000 a year if you file jointly, or $135,000 if you file as a single person, you may not be eligible. The chart below shows the limits for 2018.
For 2018 you can contribute $5,500, in total, to all your IRAs. You can contribute $6,500 if you are 50 or older. The contribution limits for IRAs typically change every year. The table below gives the limits for the 2018 tax year.
|If your filing status is …||And your modified AGI is …||Then you can contribute …|
|Married filing jointly||< $189,000||up to the limit|
|>$189,000 but <$199,000||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|
|<$120,000||up to the limit|
|>$120,000 but <$135,000||a reduced amount|
If you need to reduce your contribution because you make between $189,000 and $199,000 for joint filers, or between $120,000 and $135,000 for single filers, 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 have other options,” says Levi Sanchez, a virtual financial planner for millennials and cofounder of Millennial Wealth, Seattle, Wash. “Check to see if your employer offer’s a Roth 401(k) provision, or consider 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.
Ask these questions as you decide where to open the account:
- Is there a fee to open or maintain it?
- Does it offer customer service you like, whether it is online or by telephone?
- Does the company offer the kinds of investments you want, whether that means ETFs, target-date funds, actively managed funds or stocks and bonds?
- How much does it cost to trade? This is especially important 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. The company offers a wide selection of investment options, including target-date funds.
- E*Trade: A discount online brokerage, it offers very low trading fees and access to many different investment products.
- Merrill Edge: The traditional brokerage has a connection with a bank—Bank of America—which can make regular automatic transfers into your Roth IRA easy. Merrill Edge also has low-cost trades and the ability to work with financial advisors.
Most banks and brokerages have a web page for Roth IRAs that you can visit to begin the process. You may be able to finish the application online, or you might speak to someone in customer service.
You’ll need the following:
- Your driver’s license or another form of photo identification
- Your Social Security number
- Your bank’s routing number and your checking or savings account number, so that you can transfer money directly to your new account
- Your employer’s name and address
- The name, address and Social Security number of your plan beneficiary (the person to whom you’ll leave the money in the account when you die)
“Naming a beneficiary is very important. It allows this asset to pass to someone else without going to probate. It is also important to keep the beneficiary up to date for things like marriage, divorce or death of the beneficiary,” says Allan Katz, president, Comprehensive Wealth Management Group, LLC, Staten Island, N.Y.
The company providing you the account will ask you to fill out a 5305-R form, the IRS document you fill out when you open an account. The company that provides the account is called the custodian because it takes custody of your money.
The bank or brokerage will help you open the account and take custody of your money. But you will need to decide how to invest it.
There are three different approaches to investing in your Roth IRA.
- Design your own portfolio by picking a selection from thousands of options available at most banks and brokerages.
- Buy a target-date or lifecycle fund. It’s like an off-the-shelf portfolio designed by an investment company.
- Consult a financial advisor, either one who works with your bank or brokerage, or an independent advisor.
Design your own portfolio
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.
There are tradeoffs. Many people put more of their investments into bonds as they get older because bonds are traditionally more stable than stocks. But stocks historically have produced higher returns.
Most experts recommend buying two to six different mutual funds or exchange-traded funds—some that have stocks 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.
Buy a target-date fund
Another good option is a target date fund or lifecycle fund. These are designed to automatically adjust over time. The idea is that you need to have less risk of a large drop in value as you get close to retiring. Some examples of good fund families are Fidelity’s Freedom Funds and Vanguard’s Target Retirement Funds. If you buy a target-date fund, remember that it is designed to be your entire retirement portfolio. It’s best to buy just one.
Talk to a professional
Some people hire investment advisors to help them pick investments in their Roth IRA accounts. Others rely on guidance from the company that is the custodian of their account.
If your bank allows you to, you can set up monthly transfers from your bank account to your Roth IRA. You can also decide to make an annual contribution.
Remember, contributions to Roth IRAs are made with after-tax money so there is no tax advantage to waiting until the last minute to make your contribution.
You should check on your investments at least once a year. You may want to buy and sell investments at that time, to “rebalance” your account.
Over time, as markets rise and fall, the value of your investments will change. For example, let’s say you started the year with a portfolio that was 30% in a bond fund and 70% in a stock fund. You may find that at the end of a year, the portfolio has shifted. It may be 40% bonds and 60% stocks, if stocks have declined in value.
You might want to sell some shares of the bond fund and use the proceeds to buy shares in the stock fund. The more investments you own, the more complicated rebalancing will be. It’s typically more important the closer you are to retirement when you may rebalance to increase the percentage of fixed-income assets in your portfolio.
If you have a target-date fund, you don’t need to worry about rebalancing, but it’s still smart to check on your account.
If you hired a financial advisor, he or she will likely rebalance for you.
“If possible, everyone should have a Roth IRA provided they are eligible. It is never too early to start. My college-age daughter has a Roth IRA and my 74-year-old client started a Roth IRA when she was 72!” says Marguerite Cheng, CFP®, CRPC®, RICP®, CDFA™, CEO, Blue Ocean Global Wealth, Gaithersburg, Md.
It’s not hard to open and maintain your Roth IRA!