How to Start a Roth IRA: A 5-Step Guide for 2023

Ready to begin contributing to an individual retirement account (IRA)? You can easily set up a Roth IRA account in five simple steps. Before we learn how to start a Roth IRA, let’s review the basics of this account type.

What is a Roth IRA? Similar to a traditional IRA, a Roth IRA is a tax-advantaged account that allows investors to withdraw funds without penalty once they reach a certain age.

In this article, we’ll show you how to:

1. Determine if you are eligible
2. Find a home for your account
3. Provide the necessary information
4. Create an investment portfolio
5. Schedule regular contributions to your IRA

After learning how to start your own Roth IRA account, stay tuned for tips on how to maximize your new retirement account. 

1. Determine if you are eligible

According to the IRS, those who file taxes as a single individual and earn an annual gross income (AGI) below $153,000 are eligible to enroll in a Roth IRA. If you file taxes with a spouse, your joint income must be below $228,000 to qualify. 

Your annual gross income will also determine if you are eligible to make the full IRA contribution limit of $6,500 or if you are subject to reduced contribution amounts. 
Aside from the IRS eligibility criteria, consider tackling your debt and creating an emergency savings fund before investing in a Roth IRA. Using this strategy, you can focus on cultivating an early retirement game plan without the stress of lingering debt or unexpected expenses on your mind.

2. Find a home for your account

Remember, a Roth IRA is an account type, not an investment that lives within a retirement account. If you have little interest in maintaining your retirement account, consider housing your Roth IRA with an online broker.

The best Roth IRA accounts are ones that come fully equipped with tons of investment options. Here are some questions to consider while scouting for the best home for your Roth IRA account:

• Are you interested in passive or active retirement investment strategies? If passive, consider an investing platform. If active, opt for a DIY retirement savings account. A financial advisor can help you find the perfect match.
  
• Are there any opening or maintenance fees you should be aware of? Although it is generally free to open a Roth IRA account, some providers may have account minimums or transfer fees.
  
• Is there an abundance of investment options to choose from? Long-term investment accounts like a Roth IRA generally benefit from asset diversity. Ask your provider what kind of assets and investments are available.
  
• Is the investment platform well-suited for buying, selling, and trading investments? Active investors should know of any fees or wait times associated with investment interactions. Passive investors should also be prepared to handle any cost when it is time to liquify their assets.

Once you answer these questions, you will be able to learn how to open a Roth IRA on the platform of your choosing.

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3. Provide the necessary information

Setting up your Roth IRA account is a breeze when you have these necessary documents at your fingertips:

• A social security number (SSN)
• A valid driver’s license or state ID
• A bank routing number
• Your bank account number
• Employer’s name and address
• Beneficiary’s name, SSN, and address
• Form 5305-R from the IRS

In addition to the necessary paperwork, it’s also a good idea to have your latest tax returns nearby. Tax information can help you know what account perks you qualify for and which investment opportunities are available.

4. Create an investment portfolio

Aim to diversify the investments within your Roth IRA account. A diverse array of assets within an investment portfolio is a common way to hedge against inflation and market volatility.

Here are a few of the most popular assets that investors can incorporate into their Roth IRA account:

• Stocks: earn dividends or payouts from shares of a business 
• Bonds: earn interest from the money you lend to an entity
• ETFs: benefit from value appreciation of public index
• Mutual funds: pool your money together with other investors

Your time horizon, income level, and financial goals will ultimately determine which assets are the best match for your Roth IRA.

5. Schedule regular contributions to your IRA

Unlike a traditional IRA, Roth IRA contributions are taxed before they go to your account. So, the sooner you add your contributions, the sooner your money can begin accruing investments.

Scheduling regular contributions to your Roth IRA account can ensure that you set money aside each month for your retirement goals. Before contributing, check with your hosting platform about their contribution limits and transfer costs. 

Although you have until the next tax filing date to add contributions, you can schedule regular contributions throughout the year. However, you are also allowed to make one larger contribution annually.

Tips for maximizing your Roth IRA accounts

A Roth IRA is a long-term investment account that you can maximize in the following ways:

• Invest as early as possible
• Speak with a financial advisor
• Diversify the assets in your account
• Allow your contributions to compound
• Learn Roth IRA withdrawal rules
• Name a beneficiary

Since Roth IRA contributions are already taxed, you will be able to withdraw from your account tax-free after your 60th birthday. Contributing now will allow your investments to compound until then.

If a traditional IRA nor a Roth IRA sound capable of meeting your retirement goals, consider exploring the benefits of a self-directed IRA.

Take control of your tomorrow with an IRA.

Set aside money for retirement-and save on taxes-with a traditional or Roth IRA.

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FAQs about how to start a Roth IRA

Still have questions about how to start a Roth IRA? We’ve got answers.

What does IRA stand for?

IRA stands for individual retirement account.

How does a Roth IRA work?

Investors contribute taxed funds into their investment account and can then make tax-free withdrawals after they reach the age of 60 years old.

How much money do you need to start a Roth IRA?

The answer depends on which Roth IRA account you choose. You will potentially have to pay registration fees, account minimums, trading fees, and withdrawal fees.

Can I open a Roth IRA myself?

Yes, you can open a Roth IRA on your own. However, you should speak with a financial advisor to ensure you are aware of the rules and obligations of the account.

Where can I open a Roth IRA for a beginner?

A beginner can open a self-directed account or a Roth IRA on an investment platform.

Can I open a Roth IRA at my bank?

Yes, you can open a Roth IRA at the same bank as your traditional IRA.

How much can you put in a Roth IRA?

You can make the full IRA contribution limit of $6,500 if you meet the IRS requirements.

Is a Roth IRA or 401k better?

A Roth IRA might be a good option for investors who plan to be in a different tax bracket once they retire. However, this answer depends on your financial goals and time horizon.