How to open a Roth IRA

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Deciding to open a Roth IRA is an excellent way to supplement workplace retirement plans, including 401(k)s. For people who don’t have retirement plans through work, starting a Roth IRA may be an attractive option. 

How to Start a Roth IRA

There are many ways to open a Roth IRA. Take a look at your bank’s website to see if they offer Roth IRA accounts. If your financial institution doesn’t offer Roth IRAs, finding a brokerage firm to open a Roth IRA in person or online is relatively easy. Follow these guidelines: 

  • Confirm eligibility. Most individuals with earned income are eligible for Roth IRAs. However, there are income limits based on their modified adjusted gross income (MAGI)

  • Stay within contribution limits. In addition to income eligibility limits, Roth IRAs also have contribution limits. For 2024, Roth IRAs have a $7,000 annual contribution limit. Individuals over the age of 50 can contribute an additional $1,000. It’s important to remember that this $7,000 ($8,000 for individuals 50 years old or older) limit is a combined limit, meaning all tax-deferred accounts need to be considered. 

  • Complete application. Most brokerages and banks have websites that will walk you through setting up a Roth IRA, including online applications and customer service representatives ready to help with questions. Information needed when starting a Roth IRA include your social security number, photo identification such as a driver’s license, your savings or checking account number and bank routing number, employer’s name and address, and your beneficiary’s name, address, and social security number. 

  • Name a beneficiary. This allows you to pass your Roth IRA onto someone else upon your death without them having to go through probate.

  • Complete necessary IRS forms. During the application process, you will need to fill out form 5305-R.

  • Select investments. The brokerage firm or bank you are opening your Roth IRA with can help you open your account, but deciding how to invest money going into the account is all up to you.

Many people don’t understand Roth IRAs are not investments in themselves. They only hold investments for individuals and determine how those investments are taxed. Individuals can put all different kinds of investments into their Roth IRA. There are three main ways individuals select investments for their Roth IRAs:

  1. Design their own portfolio. If individuals are going to design their own investment portfolio within their Roth IRA, they must select investments based on their comfort level and their time horizon of retirement. It’s common for individuals to put more of their money into bonds as they get older as they are usually more stable than stocks. However, stocks historically produce higher returns. 

  2. Buy a life-cycle or target-date fund. These funds include a mixture of bonds and stocks and automatically adjust over time. As an individual approaches retirement age, the fund moves to safer investment options. 

  3. Consult with an investment advisor. Some investors like hiring an advisor to assist in picking investments for their Roth IRA account. Other investors rely on guidance from the firm that’s the custodian of their Roth IRA account. 

For individuals making too much to contribute directly to a Roth IRA, a backdoor Roth IRA conversion may be an option to consider. Whatever option you select, make sure you’re asking the right questions to determine if you’re getting what you need and what’s appropriate for your financial and retirement goals. 

After You’ve Opened Your Account

It’s important to review your monthly or quarterly statements, taking the time to reevaluate investment options at least once a year. You may decide to sell or buy investments at this time to rebalance your Roth IRA account. 

The value of your investments will change over time as the market rises and falls. For example, if you began the year with a portfolio that was 25% bonds and 75% stocks, you may find that your portfolio has shifted by the end of the year. If stocks have decreased in value, your portfolio might be 35% bonds and 65% stocks. If this happens, you may consider selling some shares of bond funds, using the proceeds to purchase more shares of stocks. 

The more investments an individual owns, the more complicated it will be to rebalance their portfolio. This usually becomes more important as retirement nears. As this happens, individuals may want to rebalance to increase the percentage of fixed-income assets that are less volatile, such as bonds.  

If individuals have a target-date fund, they don’t need to worry about rebalancing. However, it’s still a good idea for them to check on their account at least once a year. Most financial experts recommend anyone eligible for a Roth IRA to have one.

Other Considerations in Opening  Roth IRA

There are two main kinds of IRAs: traditional and Roth. A traditional IRA comes with an upfront tax break, which may be attractive to individuals wanting to lower their taxable income and planning on being in a lower tax bracket during retirement. Individuals are able to deduct their contributions from their taxes for the contribution year. Their earnings grow tax free, but withdrawals are subject to income tax when made. Roth IRAs are usually recommended for anyone who qualifies. This is because Roth IRAs have more flexible withdrawal rules and fewer restrictions for those in retirement.

Once an individual determines how much they can contribute, they should consider establishing automatic transfers from their checking or savings account for regular contributions. In addition to avoiding the hassle of making a manual transfer each month, they also help ensure regular savings. Some brokers even waive initial deposit requirements when automatic monthly transfers are set up during the application process.

While contributing the maximum amount each year is a great goal, it’s important individuals don’t contribute too much. If you contribute over the annual limit, you may be subject to IRS penalties. If individuals want to spread the $7,000 maximum contribution over a 12-month yearly period, consider contributing $542 each month. For individuals over 50 years old, this contribution level increases to $8,000 a year or $625 each month. Don’t forget these limits are for all IRA accounts you may have, traditional and Roth.

Experts advise that you utilize any retirement savings options available to you, which means if you are eligible to open a Roth IRA, you should. Talk with a Human Interest about your options when it comes to how you should save for retirement.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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