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It's easier than you think to open a Roth IRA

Quick Summary

  • 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.
  • Once the account is open, maintaining it requires very little effort.

Roth IRAs are one of the best ways to save for retirement. While there’s no upfront tax benefit, you get tax-free income in retirement—even on your earnings. There are also no required minimum distributions for Roth IRAs. That means you can leave your money alone if you don’t need it during your lifetime, and then leave your beneficiaries with tax-free income.

What’s more, anyone with earned income can contribute to a Roth IRA, regardless of age, so you can keep adding to your account as long as you wish. One more perk: It’s really easy to open a Roth IRA. Here’s how.

Be Sure You’re Eligible to Open a Roth IRA

Most people are eligible to start a Roth IRA, provided they have earned income for the year. But if you make $203,000 a year if you file jointly, or $137,000 if you file as a single person, you may not be eligible.

For 2019, you can contribute a combined $6,000 to all your IRAs ($7,000 if you’re 50 or older). The contribution limits for IRAs typically change every year or so. Here are the limits for 2019:

If your filing status is And your modified AGI is You can contribute
Married filing jointly < $193,000 up to the limit
>$193,000 but <$203,000 a reduced amount
> $203,000 zero
Married filing separately but you live with your spouse <$10,000 a reduced amount
>$10,000 zero
Single, head of household, or married filing separately and you did not live with your spouse

 

<$122,000 up to the limit
>$122,000 but <$137,000 a reduced amount
>  $137,000 zero

If you need to reduce your contribution because you make between $193,000 and $203,000 for joint filers, or between $122,000 and $137,000 for single filers, you can find the formula for figuring how much you can contribute on the IRS website.

If you make too much to contribute directly to a Roth IRA, a backdoor’ Roth IRA conversion may be an option.

Decide Where to Open a Roth IRA

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’s 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.

The bank or brokerage you open the account with is called the “custodian” because it takes custody of your money.

Fill Out the Paperwork

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:

  • A 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.
  • The name and address of your employer.
  • The name, address and Social Security number of your plan beneficiary (the person you’ll leave the money in the account to when you die).

Naming a beneficiary is very important. It allows the account to pass to someone else without having to go through probate. Remember to keep the beneficiary up to date after events like marriage, divorce, or death of the beneficiary.

As part of the application process, you will have to fill out a 5305-R form for the Internal Revenue Service (IRS).

Make Investment Choices

The bank or brokerage will help you open the account, but you’ll need to decide what investments go into the Roth. This is the most difficult part of starting a Roth.

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’re going to design your own investment portfolio within your Roth IRA, it’s important to pick investments based on your comfort level and your time horizon. Many people put more of their investments into bonds as they get older because bonds are traditionally more stable than stocks. Of course, stocks historically have produced higher returns, so there’s a trade-off.

New rules of thumb say it’s okay to keep more stocks in your portfolio as you get older. That’s because people are living longer, have lower retirement savings, and have increased medical expenses.

Most experts recommend buying two to six different mutual funds or exchange-traded funds (ETFs)—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 0.5%. 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’s 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. Either way, do your homework to make sure you’ll get the advice you need.

Set Up Your Contribution Schedule

If your bank allows you to, you can set up monthly transfers from your bank account to your Roth IRA. Alternatively, you can decide to make an annual contribution.

Remember, contributions to Roth IRAs are made with after-tax money, so there’s no tax advantage to waiting until the last minute to make your contribution.

Check Your Account at Least Annually

Plan on checking 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. If stocks have declined in value, it now may be 40% bonds and 60% stocks.

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 should rebalance for you.

Many financial experts say everyone should have a Roth IRA if they’re eligible. It’s never too early (or too late) to open a Roth IRA—and it’s easy to get started.

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