How to Open a Roth IRA

SHORT ANSWER: Opening a Roth IRA is simple and can usually be done in a few minutes online. Benzinga shows you how below. 

Opening a Roth individual retirement account (IRA) can be the first step to a comfortable retirement in your golden years. It only takes a few minutes, and these tax-advantaged accounts mean your money can grow tax-free. Roth IRAs offer attractive tax advantages and no minimum withdrawals, making them a good option to supplement your employee-sponsored 401(k).

It's never too early to start saving for retirement. If you deposit the maximum in your Roth IRA each year, you could be well on your way to financial security throughout your life. Whether you're self-employed, in college or already working for an employer, setting up a Roth IRA can be a smart move. Learn how to open a Roth IRA today below. 

What Is a Roth IRA?

A Roth IRA is a specialized retirement account with several advantages to help you build your retirement savings. A Roth IRA takes after-tax dollars, offering tax-free growth and withdrawals in retirement. 

Unlike a traditional IRA, contributions to a Roth IRA aren't tax-deductible but, the funds grow tax-free, and you don't have to take any minimum distributions when you reach retirement age (59½). You can also leave the money in the account to keep growing after you've retired, further compounding growth. As long as the account has been open for at least five years and you're 59½ or older, you can withdraw from your Roth IRA without paying federal taxes.

Also, unlike a traditional IRA or 401(k), you can withdraw Roth IRA contributions penalty-free before retirement age. However, you cannot withdraw earnings from those contributions without penalties. 

How to Open A Roth IRA in 7 Steps

The step-by-step process of how to open a Roth IRA account can be done in under half an hour, although your investment research may take longer. Before you think about opening your Roth IRA, make sure that a Roth IRA is better for your savings goals than a traditional IRA. Here are the steps to take:

1. See Whether You Qualify for a Roth IRA

Because of the significant tax advantages of a Roth IRA, high-income earners may not qualify. Each year, the IRS sets income limits for Roth IRA contributions and maximum contribution limits. For 2024, the contribution limit is $7,000 if your modified adjusted gross income (MAGI) is below $146,000 for single filers or below $230,000 for married filing jointly. 

If you’re 50 or older, the maximum contribution amount goes up $1,000 to $8,000. If your income is above those limits, your contribution limit could be smaller and is eliminated at $161,000 for single filers and $240,000 for those married filing jointly in 2024.

2024 Roth IRA Contribution Limits

2. Weigh the Pros and Cons of a Roth vs. Traditional IRA

If your income is above the Roth IRA limits, you can still contribute to a traditional IRA. The difference between a Roth IRA and a traditional IRA has to do with when you pay taxes on your account contributions. When you open a traditional IRA, you will not have to pay taxes on your annual contributions.

However, you will have to pay taxes when you withdraw the money during retirement. A Roth IRA is the opposite — you must report your account contributions when filing your federal taxes, and you must pay taxes on your contributions. However, when you withdraw your savings during retirement, you won’t be taxed again, meaning your money can grow tax-free.

For most younger investors, a Roth IRA is a superior choice because as you gain more experience in your field, your tax bracket will likely rise. If you anticipate being in a lower tax bracket during retirement than you are now, consider a traditional IRA.

If your income exceeds maximum limits, a backdoor Roth IRA strategy lets you open a Roth by converting money from a traditional IRA or 401(k). If you previously received a tax deduction, then the Roth conversion would be taxable. You'll get the benefits of a Roth IRA, including taking out any investment gains tax-free in retirement. Learn more about how to convert a 401(k) to a Roth IRA. You can also compare the differences of a Roth IRA versus a savings account.

3. Choose a Provider

Almost every financial institution offers its account holders the option of opening a Roth IRA. You can find Roth IRA options from E*Trade to Vanguard. When choosing a Roth IRA provider, research several providers and choose the one that’s right for you. One of the main considerations is the selection of stocks and bonds from various providers.

You'll also want to weigh account minimums, customer service options, commissions and account maintenance fees. To maximize account earnings, aim for an account provider with low or no maintenance fees with a low minimum deposit.  

For example, Vanguard offers a wide range of commission-free, high-performing mutual funds, but you’ll need $3,000 to buy into most of them. Do your due diligence and read up on several providers until you find one that fits your needs.

Want ideas of where to start? Check out Benzinga's roundup of the best Roth IRA accounts. 

4. Open an account online

Once you’ve chosen a provider, opening your account usually only takes a few minutes. The steps you’ll need to take will depend on the provider, but the process is usually simple. Most banks and brokerage firms have digitized the Roth IRA process so that you can open your account from the comfort of your home or office.

Before opening an account, you’ll need to provide your full name, address, Social Security number and banking information. Remember to use a secured Wi-Fi network when setting up your IRA — you don’t want hackers accessing your sensitive banking data.

5. Make your first contribution

Now comes the exciting part — making your first contribution. Before buying stocks, bonds or mutual funds, you must transfer cash from another bank account to the Roth IRA brokerage account.

Once the transfer is complete — usually within 24 hours to three days — you can start purchasing securities. But first, you’ll need to decide what you want to invest in. Consider your risk tolerance, age and financial goals to build a diversified, risk-sensitive portfolio. 

Many people choose a mixture of both stocks and bonds. Some investors opt for index funds, which track the U.S. stock market. Your portfolio composition will depend on how many years you have left to save for retirement and your risk tolerance.

As a general rule, older consumers may want to hold more conservative investments that are not as susceptible to market fluctuations. Stocks have traditionally produced better results in the long run, but they are more likely to be volatile. You can speak with financial advisors, such as those offered by your Roth IRA brokerage, to help you determine an appropriate mix for your savings goals.

You can consider using robo-advisors for your Roth IRA or compare the pros and cons of a financial advisor vs. robo-advisor for investment planning. Find some of the best financial planners here. 

6. Set up regular contributions

One way to maximize your Roth IRA contributions is to set up weekly or monthly contributions. If you're younger than 50 this year, you could contribute $583.33 per month or about $134 per week. 

One technique investors use to hedge against market fluctuations for long-term investments is dollar cost averaging. It means you contribute regular, smaller amounts to buy the same security without trying to time the market. This allows you to take advantage of times of greater value and leads to an overall average of a (possible) better return. If you want to use weekly dollar cost averaging for your Roth IRA, you could buy a mix of mutual funds, stocks, and bonds with your $134 contribution each week. 

You can learn more about how much to put in a Roth IRA per month and find the best IRA accounts. 

7. Check on your account

After you make your first contribution, you’ll probably want to check on the account. Be sure to check on your investments at least once a year, and don’t be afraid to rebalance your account if your financial or long-term retirement goals change. You can also double-check that you’re putting in the maximum amount of money allowed by law. If you notice that you have not reached the maximum, you have until April 15 to make additional contributions. 

What to Consider When Opening a Roth IRA Account 

When opening a Roth IRA, consider investment offerings, fees, individual brokerage limits and ease of use. Here's why you want to consider each of these:

• Investment offerings: Look for a Roth IRA account that offers a variety of investment vehicles to diversify your portfolio. It shouldn't significantly limit your investment goals. 
• Fees: Fees will reduce your final returns. Ideally, your Roth IRA provider or brokerage should charge low or no fees. 
• Individual brokerage limits: Do the securities offered have a high buy-in limit, or can you invest with a small amount? If it requires a larger buy-in, do you have the resources for that?
• Ease of use: Choose a Roth IRA provider whose user interface and access are easy for you to use. Consider whether you can access the account online or via an app and how easy it is to use. 

Should You Open a Roth IRA?

Yes, opening a Roth IRA can be a smart choice for most people. With tax-free growth of invested funds, you could be one step closer to setting yourself up for a strong financial future.  As long as you meet income limits, you can set up and start contributing to a Roth IRA this year and have until April 15 to finish making contributions for 2021. 

Not sure if you're saving enough? You can check out the average retirement savings by age and income to see how you compare. Then, you can find the best investments for a Roth IRA or get more investing advice to prepare for retirement here. 

Frequently Asked Questions