How to Open a Roth IRA

How to Open a Roth IRA

How a Roth IRA works

A Roth IRA requires you to contribute after-tax savings to the account, rather than pre-tax savings, as with a traditional IRA. Then it allows you to withdraw qualified earnings tax-free at retirement. So you pay taxes today in exchange for keeping your savings and earnings tax-free in the future. That’s one of many ways that a Roth IRA beats a traditional IRA.

It’s best to think of a Roth IRA as a “wrapper” that can go around many types of accounts to protect them from the taxman. Many companies offer a Roth IRA, including banks, brokerages and robo-advisors, and each allows you to make various types of investments.

What you can earn in a Roth IRA all depends on what you’re invested in. At a bank you can invest in CDs, which are safe and insured by the FDIC so that you won’t lose principal (up to $250,000 per depositor, per bank).

At brokerages and robo-advisors, you can invest in assets such as stocks and bonds that can earn much more over time, but aren’t protected and can lose money. While a CD specifies what you’ll earn each year, these other investments can fluctuate, sometimes drastically.


Roth IRA taxes vs traditional IRA taxes?

With a Roth IRA, you pay taxes on your contributions upfront so you don't have to pay them later when you withdraw money from your retirement fund (as long as your account has been open for at least five years).

This is the biggest difference from a traditional IRA, which lets you delay paying taxes until you withdraw funds later down the road. With traditional IRAs, your contributions are also tax-deductible, up to certain limits, so your contribution reduces the amount you owe in taxes each year.

A good rule of thumb when choosing between the two types of IRA accounts is to consider your tax bracket:

  • Choose a Roth IRA if you expect that you'll be making more money in your later years — and thus in a higher tax bracket. It makes more sense to pay taxes today to take advantage of your current low tax rate before it goes up. Plus, since your withdrawals from Roth IRAs don't count as income and aren't taxed after 59 and a half, you can count on every dollar in your account when making withdrawals.
  • Choose a traditional IRA if you expect that you'll be making less money in your later years — and thus in a lower tax bracket. In this case, it makes more sense to reduce your taxable income in the present, so in theory you'll pay less in taxes both now and in the future when your tax rate is lower.

Use an online calculator like this one from Charles Schwab to help you decide between a Roth IRA or a traditional IRA.

Portfolio Analysis

Fidelity offers a variety of tools to help you figure out if your portfolio is on track. The “Guided Portfolio Summary” shows an overview of your top positions and ratings, asset allocation, stock analysis, and fixed income analysis. From there, you can click through to the “Planning & Guidance Center” to see if your portfolio is still on course, considering any recent market volatility.

Another helpful tool is “Full View”, which consolidates all your accounts—Fidelity and otherwise—into one convenient view. You can use it to track your net worth over time, create and manage your budget, view your recent transactions, and integrate it with other Fidelity planning tools.

Unrealized and realized gains/losses, account balances, margin, buying power, and internal rate of return all display in real-time. Fidelity provides access to third-party tax reporting programs, including TurboTax, H&R Block, and TaxAct. Tax-related reports show up online and you can download them as CSV and PDF files. You can maintain a trading journal and attach notes, graphs, and other market data to your trades.

While the trade ticket calculates a short-term or long-term gain/loss for the order, there isn't a standalone tool to calculate the tax impact of future trades.

Trade Experience

The web platform has a relatively easy workflow, and you can link to news and research from symbols in your portfolio or watchlist. Quotes and news don't update automatically, so you must click the refresh button at the top of the screen to see up-to-date information. However, you can view streaming quotes in a watch list by toggling the streaming button on. You can set a few trading defaults on the web, such as whether you want a market or limit order, but you have to make most choices when you place the trade.

Active Trader Pro is more robust than the web option and it's also more customizable. You can create personalized layouts to view the information that's most important to you. You can also set trade defaults, create shortcuts, and use hotkeys to navigate through the platform and speed up order entry. The platform supports chart trading, and you can stage orders for later and place basket trades. There's streaming real-time data across the platform, including in watchlists, charts, order entry tickets, and options chains. The platform also provides a probability calculator, options analytics, measures of cross-account concentrations, and much more. 

Fidelity's Mobile Experience

On Fidelity's mobile app, you can trade stocks (including fractional shares), ETFs, options, and mutual funds—but not fixed income. The mobile offering is comprehensive, with much of the same functionality as desktop. That said, fundamental analysis and charting are limited, and you can't place conditional orders.

Fidelity has recently introduced an opt-in beta experience for mobile that delivers on many of the most requested features from new customers, including:

  • A new home screen with a simplified, modern view
  • A new quote experience that delivers information more quickly
  • A new, streamlined trade ticket that is easier (and faster) to use

Whats the difference between a Roth IRA and a traditional IRA?

A Roth IRA is very similar to a traditional IRA: You can make consistent contributions to your Roth, which will be invested in the market allowing the money to grow over time so you have a healthy savings when you reach retirement age.

But Roth IRAs have a few components that make them stand out from your traditional IRA. Here's what makes them unique:

  • When you withdraw your contributions from a Roth IRA in retirement, those withdrawals are generally tax free (as long as your account has been open for at least five years) and they don't count as income. Withdrawals in retirement from a traditional IRA and 401(k) will be taxed as income.
  • Contributions into a Roth IRA use after-tax dollars, unlike contributions to a traditional IRA or 401(k), which are not taxed. This may be a bigger hit to your finances in the short term, but your money will grow tax free.
  • If you withdraw earnings you've made on investments in a Roth IRA before age 59 and a half, you'll incur a 10% early withdrawal penalty and may be subject to income tax.
  • There are exceptions to the early withdrawal penalty on Roth IRAs, including taking out funds for first-time home purchases, college expenses and birth or adoption expenses.
  • Your tax filing status and income level determine whether or not you can contribute to a Roth IRA: if married filing jointly, the annual income threshold is below $208,000; if single, the income threshold is below $140,000; if married filing separately and you lived with your spouse, the income threshold is below $10,000.

We dig into these differences a little bit more in the FAQs below.

Step 1:

Open a Fidelity IRA

Our IRAs have no account fees or minimums to open1 and commission-free trades.2 If you haven’t done so already, open a Fidelity traditional, rollover, or Roth IRA. It’s quick and easy.

Key takeaways

  • When choosing investments, think about how comfortable you are with risk.
  • Make sure that the amount of any stocks, bonds, and short-term securities in your asset mix reflects your time frame for investing and the associated need for growth.

You’ve contributed to an IRA—congratulations. The next step is to invest that money—and give it the potential to grow. Fidelity believes one of the best ways to do that over the long term is by considering an appropriate amount to invest in a diversified portfolio of stock mutual funds, exchange-traded funds (ETFs), or individual stocks as you plan and implement an investment strategy that fits your time horizon, risk preferences, and financial circumstances.

As a general rule, the more time you have to save, the greater the percentage of your money you can consider allocating to stocks. For those closer to retirement, a healthy allocation to stocks may still be appropriate. These days retirement may last for decades, so the money will likely still need to grow for many years even after you retire.

It’s important that the stock exposure you select matches your comfort with risk, your investment timeframe, and your financial situation.

What kind of investor are you?

Don’t have the time, expertise, or interest it would take to choose investments and maintain an appropriate mix of investments in your IRA? Consider a professionally managed target date or asset allocation fund.

Target date funds let an investor pick the fund with the target year closest to their expected retirement. The target date fund manager then selects, monitors, and adjusts the investment mix over time. Asset allocation funds can be another simple way to diversify your portfolio using a single fund. In these funds, the manager sets and maintains a fixed asset mix.

For those doing it on their own, a diversified mix of investments is important. That way, a portfolio isn’t dependent on any one type of investment, although diversification does not ensure a profit or guarantee against loss. If you want to do it yourself, consider funds that hold a mix of investments in companies both big and small, from different parts of the world, and in different industries and sectors.

Low-fee investments that simply track the broad market through a benchmark index, may also be worth considering.

How to Invest in a Roth IRA with Fidelity

I’ll walk you step-by-step through how to invest your first dollar into an index fund that tracks the S&P 500, which simply measures the stock performance of the United States’ 500 largest companies.

This is a smart and simple way to start investing. Picking stocks that beat the market consistently is tough. With the S&P 500, if one stock fails, you have the other 499 stocks to keep you afloat. This index fund has averaged a 7% rate of return in its lifetime.

Step 1: Open a Fidelity Account (Roth IRA)

First, we want to register an account with Fidelity (you’ll need your name, SSN, DoB, etc).

Select Open an Account.

Choose Open Now under Roth IRA.

Choose Open Now under Roth IRA.

You’re probably not a customer yet if you&rs

You’re probably not a customer yet if you’re reading this article 🙂

Enter your personal information here.

Enter your personal information here.

Employment Status. You may be asked about your Emp

Employment Status. You may be asked about your Employment Status. This can be modified at any time, so don’t worry too much about the specifics.

Core Position. You may also need to select your Core Position. This is where your money resides when it’s not being invested. For the most part, it doesn’t matter which one you select. Your money should pretty much always be invested. All that being said, choose SPAXX.

Congratulations! You’ve successfully registered an account with Fidelity. Verify that you received a confirmation email upon registration.

You should see a Dashboard when you log in. The Positions tab will tell you where your money is invested in all your investment accounts. Currently, you should have no investments.

Step 2: Transfer Money Into Your Roth IRA

Step 2: Transfer Money Into Your Roth IRA

Next, we need to transfer money into the Roth IRA. Money transferred will go into the Core Position, meaning it’ll just sit in your account as if it’s sitting in your checking account. It’s not invested, yet, but you still need to take this step.

Select the Transfer tab.

In the From section, select Link a bank to a Fidel

In the From section, select Link a bank to a Fidelity account and follow the instructions to add your bank account.

Then, you’ll want to set From to be your ban

Then, you’ll want to set From to be your bank account and To to be your Roth IRA.

You may have the option to select your contribution year as well. You can contribute to the previous year until April of the current year. It’s always best to max out the previous year before getting started on this year so that you have more money to contribute in the future.

Select Continue.

Select Continue.

Once you have confirmed the transfer, it will take approximately one business day until the transfer is complete. So, now you can take a break.

Step 3: Invest in Stocks Inside Your Roth IRA

Once you have the money transferred into your Roth IRA, the Core Position row should show the amount of money transferred.

This money is not invested, yet.

I repeat.

It is not invested.

In this example, we will use the money transferred into our Roth IRA to buy FXAIX, the Fidelity S&P 500 index fund.

First, select the Accounts & Trade tab, then select Trade.

Choose your Roth IRA as the account.

Choose your Roth IRA as the account.

Choose Mutual Funds as the Transaction Type. Searc

Choose Mutual Funds as the Transaction Type. Search FXAIX as the Symbol.

It should also say how much money you have available to buy these funds next to Cash Available to Trade.

Select Buy as the Action and input the amount of money you want to use to buy this index fund.

Select Preview Order and confirm the order.

Select Preview Order and confirm the order.

Great! You’ve invested your first dollar.

Step 4: Set up Automatic Monthly Investments

Now that you’ve invested some of your money, it would be a great idea to make this a recurring payment. To max out your Roth IRA in 2022, you would ideally be investing $6,000 / 12 = $500 per month in your Roth IRA.

That is a lot of money for many people, so let’s make that our goal. Maybe you’ll want to start with $50 per month and then slowly work your way up there.

In this example, we’ll start automatic monthly investments into FXAIX (S&P 500) every 3rd of the month.

First, we’ll go to Accounts & Trade and select Transfers.

Select Manage automatic investments.

Select Manage automatic investments.

Select Schedule a new transfer.

Select Schedule a new transfer.

Select Set up an automatic investment.

Select Set up an automatic investment.

We want to transfer funds from an external bank ac

We want to transfer funds from an external bank account into our Roth IRA.

Within Transfer To, select Mutual funds you own.

Within Transfer To, select Mutual funds you own.

If FIDELITY 500 INDEX FUND shows up, choose that option and enter the monthly amount to the right. If it doesn’t show up, wait until the next business day for your previous trade in Step 3 to complete. You can modify all of this at any time.

Finally, we’ve set up our automatic monthly

Finally, we’ve set up our automatic monthly investments in our Fidelity Roth IRA!

Digital Tools to Help You Stay Connected

Check your accounts, move money, pay bills, pay family and friends, and turn your card on and off – all from your mobile device. Digital Banking at Fidelity Bank lets you do virtually everything on your banking to-do list without driving to a branch. Whether on your phone or computer, we’ve got you covered.

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