Knowing how much you should save for retirement is a task unto itself, but whatever that number is, one thing’s for certain: the sooner you start saving, the better. Individual retirement accounts, or IRAs, are frequently used vehicles people can use to build their nest egg. This article focuses specifically on Roth IRAs, why you might want to open one, and how you can open your very own Roth IRA today.
In just a few minutes, you’ll know everything you need to know about how to open a Roth IRA.
Here’s the nitty-gritty on how to open a Roth IRA and begin making the contributions that’ll help fund your golden years.
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Make sure a Roth IRA is right for you. If you’re reading this article, odds are you’ve already done the necessary research and figured out that a Roth IRA is right for you. Double check that: Make sure you’ve done the research on Roth vs. traditional IRAs, and that you’re contributing to employer-sponsored retirement savings plans like 401(k)s if possible.
There’s nothing in this world quite like free money, and and employer match is literally that.
Generally speaking, Roth IRAs are for people who expect their personal tax rate to be higher when they’re nearing or in retirement than it is today. Since, unlike traditional IRAs, Roth IRA contributions are made with after-tax dollars, you’re locking in your current tax rate — you won’t have to pay taxes again when you come back looking for distributions in retirement.
How to open a Roth IRA. “Once you’ve determined it’s appropriate to open a Roth IRA, you should research different brokerage companies to choose the best custodian for your account,” says Thomas Walsh, certified financial planner and portfolio manager with Palisades Hudson Financial Group’s Atlanta office.
The number of brokerage companies that offer Roth IRAs could fill a phone book, and all the biggest financial institutions will be happy to set you up with an account. Fidelity, Bank of America’s (ticker: BAC) Merrill Lynch, Charles Schwab, Vanguard, TD Ameritrade, you name it — they’re all in the biz. A simple Google ( GOOG, GOOGL) search will overwhelm you with options.
Obviously, it’s difficult to choose the best custodian for your IRA without knowing what metrics make a custodian “good” in the first place.
“Some details to look into include trading commissions, account maintenance or closure fees and investment options and accessibility,” Walsh says. These details are typically easily accessible on the institution’s website, so feel free to compare and contrast.
After you find the brokerage firm for you, simply fill out an application.
“The application will typically require you to provide information about yourself such as personal contact information, Social Security number and details from your driver’s license,” Walsh says.
It’s not rocket science; Schwab boasts about the ease of the process on its IRA website, promoting that customers can “open your account in as little as 15 minutes.”
Funding and contributing to your account. After that, funding your account is a breeze; just provide your bank account and routing numbers and determine the size of your first Roth contribution. It’s important to note that many online brokers have very low initial contribution requirements, with $500 to $1,000 being the lower-end Roth IRA requirements. With some providers, there’s no minimum deposit at all, although they often caveat that with a need to set up recurring contributions.
Either way, opening a Roth IRA account is affordable. Yes, $1,000 is a nice chunk of money, but it’s merely a drop in the bucket in the grand scheme of things; you’ll be investing in the market for decades to come.
Unlike a brokerage account, however, you can’t just decide to bet the farm and invest a heap of money in your Roth IRA account. There are annual contribution limits: $5,500 if you’re under 50 and $6,500 if you’re 50 or over. And if you decide to take a year off of work or retire without a part-time job, forget about maxing out those contributions that year.
“You’ve got to make sure you have earned income at least equal to the amount that you contribute to your IRA,” says John Piershale, certified financial planner professional and wealth advisor at Piershale Financial Group.
Roth IRAs are also of limited use to people with high incomes.
“If you make too much money, you can’t open a Roth IRA with a contribution. If you’re single, and if your income is over $133,000 for the year, you can’t add to a Roth, your only option is a traditional IRA,” Piershale says.
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Married couples with income over $196,000 are also legally “phased out” of making Roth IRA contributions.
Other, more creative ways to open Roths. If you happen to be doing so well for yourself that you can’t legally contribute to a Roth, don’t worry: tax law addresses you.
Here’s how: Simply “take advantage of a provision that allows you to contribute to a traditional IRA, and then convert to a Roth. Qualified tax and financial advisers should be consulted if considering such a strategy,” says Neal Stern, a certified public accountant and member of the AICPA’s National CPA Financial Literacy Commission.
Traditional IRA-to-Roth conversions are typically best done in small amounts, especially if there are large sums at stake. Remember, when you convert those pre-tax traditional IRA dollars to a Roth (which can only be funded by after-tax income), you’ll have to pay the income taxes on those contributions because they weren’t paid the first time around.
There’s a third legal way to fund your Roth account as well: simply roll over money from your employer plan straight into your Roth.
“If you roll a regular 401(k) plan over to a Roth, you’ve got to pay the tax on the whole balance. But if you set up a Roth 401(k) at work and you roll that over to a Roth IRA, you don’t have to pay tax on that,” Piershale says.
Invest wisely and retire happy. Knowing the ins and outs of different retirement accounts and savings plans is an investment in yourself, and will do you wonders in the long run. Whether you’re buying stocks, mutual funds, index funds, or other exchange-traded funds, being in the stock market — and being in it for a long time — is a crucial part of retiring well.
When you open your IRA, do so with a vision for the future. And it would be wise not to plan on cashing out any investments in your Roth until you’re 59.5 or older — otherwise you’ll incur a 10 percent early distribution penalty. Finally, contribute sooner rather than later. Compound interest is the secret to the stock market’s magical returns over time, but compounding can’t work its magic without an initial investment.
Another little-known tip regarding Roths: if you want to withdraw earnings tax-free, you have to wait five years from the tax year of your first contribution. It’s a pesky little IRA rule, but ignoring it can be painful.
[See: 7 of the Best Stocks to Buy for 2017.]
It’s not setting up an IRA that’s tough — it’s the patience, the years of investing your hard-earned money in companies, funds and indexes you’ll have to wait years or decades to see pay off.
Regardless of how you open up your Roth IRA — a simple contribution, a traditional-to-Roth conversion, or a 401(k) rollover — odds are you’ll be glad you did.
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How to Open a Roth IRA originally appeared on usnews.com
