How To Start a Roth (Or Traditional) IRA

How To Start a Roth (Or Traditional) IRA

Why Start a Roth IRA?

A Roth IRA is a great way to supplement your 401(k) or other workplace retirement plan. Fun fact: 8 out of 10 millionaires invested in their company’s 401(k) according to our National Study of Millionaires. That means their boring old workplace retirement account played a huge part in their financial success! On top of that, 3 out of 4 millionaires invested outside of their company plans too.But if you don’t have a retirement plan at work—and lots of people don’t—a Roth IRA isn’t just a nice thing to have. It’s essential. 



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With a Roth IRA, you won’t pay any taxes on the money you take out in retirement once you hit age 59 1/2. That’s because you invest in a Roth IRA with after-tax money—meaning you’ve already paid taxes on it.

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How much should I contribute to my Roth IRA?

When deciding how much money to deposit into your Roth IRA, you are limited to a certain amount each year.

Roth IRAs have the same contribution limits as traditional IRAs, which is the below for 2021:

  • Those under age 50: Total contribution limit to both Roth and traditional IRAs of up to $6,000
  • Those 50 or older: Total contribution limit to both Roth and traditional IRAs of up to $7,000

How to Start Investing in an IRA

2. Fund your account

Now it’s time to put the minimum amount in to fund your brand new account. As previously mentioned, different brokerages have different minimum requirements, so 

3. Select your investment strategy

Your next step is building a system that will allow you to seamlessly build wealth over time. This means figuring out how much you can afford to invest in an IRA each month, but it also means choosing investments that will exist within your IRA.

Remember: Your IRA is nothing more than a retirement vehicle you can use to save and invest for the future. Once you open an IRA, you still have to choose the investments that do the work inside your account.

If you find you are able to deduct contributions to a traditional IRA because your employer doesn’t offer a retirement plan, you should strive to contribute as much as you can each month up to the $500 monthly (and $6,000 annual) limit. That way, you’re building up retirement funds in a hurry while maximizing tax advantages. If you opt for a Roth IRA instead, you won’t get any tax advantages now, but you will later on since you won’t have to pay income taxes on distributions once you reach retirement age. Either way, the ultimate goal is striving to invest as much as you can each month up to account limits, and without harming your other financial goals. 

In terms of selecting your portfolio, this component of your system depends a lot on which investment platform (brokerage firm) you choose to go with. Some firms like M1 Finance let you set up “pies” of investments that are based on fractional shares. With M1 Finance, you can build your own “pie” from more than 6,000 available stocks and funds, but you can also choose from “Expert Pies” that have been put together by in-house investment professionals.

That’s just one way this can work, but there

That’s just one way this can work, but there are plenty of other ways to set up a portfolio depending on the firm you choose. For example, let’s imagine you decide to open an IRA with Betterment.

Betterment is a robo-advisor that helps you formulate an investment plan based on your age, your investing goals, and your risk tolerance. As a result, opening an IRA with Betterment is a breeze. You’ll start by answering some basic questions about yourself, including your age, your income, and when you plan to retire. From there, Betterment will suggest a specific investment plan that is formulated to help you achieve your goals.

If you’re a knowledgeable investor who wants

If you’re a knowledgeable investor who wants to select the stocks, bonds, ETFs, and other investments that live within your IRA, that’s perfectly okay, too. Just remember that some brokerage firms will help create an investing plan for you based on how much you can invest and your long-term goals.

4. Make it automatic

To help in your effort to contribute consistently, and to remove some of the pressure, consider making your investments automatic with the click of a button. Many of the top brokerage firms let you set up automatic investments through their mobile apps or online platforms, including Betterment’s example below.

5. Check in regularly and stay on track

5. Check in regularly and stay on track

Part of the fun of putting away money for your future is watching it grow. Keep an eye on your portfolio to make sure you’re contributing the way you want to. It can be tempting during tighter financial times to stop contributing, but you can always reduce your contribution amount depending on your circumstances and then change it back later. Don’t worry about small fluctuations and seek help from an advisor if necessary. 

Roth IRA Rules

Eligibility

To contribute, you must earn income. There are no age limits.

Income Limits

2021 If you are single, $125,000 or less If you file jointly, $198,000 or less   2022 If you are single, $129,000 or less If you file jointly, $204,000 or less

Contributions

Are not tax deductible

Maximum Contributions

2021 and 2022 Up to age 50: $6,000 Age 50+: $7,000 Non-income-earning spouse: $6,000 (into a separate IRA)

Earnings

Grow tax-free

Distributions

Free from federal income tax when: – The Roth IRA account has been open for at least 5 years -You are age 59 1/2 or older

Required Minimum Distributions

Are never required

Early Withdrawals

Before age 59 1/2 are subject to a 10% penalty in addition to any ordinary income tax that may be due

5. Choose investments for the long term

Investing for retirement is a marathon, not a sprint. We recommend a buy-and-hold strategy. A buy-and-hold strategy is exactly what it sounds like—you’re buying shares of mutual funds and then holding them for a long time. That means you don’t go chasing quick returns.

Some years, you’ll see giant returns on your investments, and in other years, you might see negative returns. The stock market is like a roller coaster with ups and downs. The only people who get hurt are the ones who try to jump off the ride before it’s over.

The folks who became Baby Steps Millionaires didn’t freak out over what happened to their investments in any particular year. They didn’t pull their money out when the market started tanking. They stayed focused and kept investing month after month, year after year—no matter what was happening in the stock market.

How often should I contribute to an IRA?

Make it consistent. The other key is to make consistent contributions — even better to automate the process altogether (contact your HR department to set up automatic paycheck contributions or set up an automatic transfer from your bank). For one, this ensures you’re making saving a habit. But there’s an additional benefit, known as dollar-cost-averaging 

It works like this: If you want to max out your IRA, you could invest $6,000 all at once, or you could invest $500 each month. Investing in increments is one way to dull the psychological impact of market volatility because you aren’t watching a large sum of money potentially decline in value out of the gate. Dollar-cost averaging may also help you arrive at a better average price for your portfolio investments.

If you have the funds and can stomach a little volatility, a Northwestern Mutual analysis shows investing a lump sum all at once tends to outperform dollar-cost averaging over the long run. Regardless, it’s beneficial to develop a consistent investment strategy that works for you and makes it easier to participate in markets for the long term.

Who Can Open a Roth IRA?

As long as you have earned income, you can open and contribute to a Roth IRA. The exception is if your earned income for the year exceeds the limits set by the IRS.

Minimum Deposit Requirements for a Roth IRA

The IRS has no minimum deposit requirements. You can put as little money as you want into a Roth IRA with many brokerages. Each brokerage firm has its own minimum deposit requirements. 

Generally, when you have a higher minimum deposit requirement, you also get access to more personalized services like guidance from professional advisors.

Basic Level 

Many investment companies like Fidelity and Charles Schwab will allow you to open a Roth IRA with no minimum investment requirement. You’ll manage the investments on your own. These brokerages often provide online planning tools or education materials, but not personalized advice.

Some Professional Advising 

Some brokerages offer additional services, but require a higher minimum deposit. For example, Merrill’s Guided Investing requires a $1,000 account minimum and charges a 0.45% annual fee. With this account, you can access an investment advisory platform aligned to your goals.

The Fidelity Go Roth IRA plan has no minimum deposit requirement. But you’ll pay an advisory fee for accounts with more than $10,000 for Fidelity professionals to choose and manage your investments according to your goals. 

Advanced Personal Planning and Advice 

You can often find more customized investing advice with accounts with higher minimum deposits. If you’ve been saving through your Roth IRA for years, you may have enough money to meet the deposit requirement for these services, which can range from about $20,000 to $25,000. 

You’ll typically face an advisory fee with these accounts, which is an annual fee that is a percentage of your invested assets. For example, Merrill advisory fee for an advisor with its Guided Investing Account is 0.85%, while Fidelity charges 0.5% per year for Fidelity Personalized Planning & Advice Roth IRA.

How to Start a Roth IRA

You can open a Roth IRA at a bank, credit union, brokerage or mutual fund company. Follow these steps:

  1. Decide whether you want a deposit account or an investment account for your Roth IRA. An investment account offers greater potential for growth, but comes with risks. Your account balance can go up and down. The balance in a deposit account won’t decrease (unless you make withdrawals), and it’s federally insured for up to $250,000, but you may not earn as much.
    • Interested in a deposit account? Get started with a Roth IRA certificate account.
    • Interested in an investment account? Talk to a financial advisor at Navy Federal Investment Services.
  2. Make a contribution. You can put up to $5,500 a year into your Roth IRA. If you’re age 50 or older, you can make an additional $1,000 catch-up contribution each year.
  3. Monitor your account. Over time, tax-free compounding interest or investment returns help your balance grow.
  4. Make plans to live the life you want when you retire. Planning ahead by opening a Roth IRA and contributing to it every year can help you achieve your retirement dreams.

Summary

Whichever Roth IRA investment account you choose, be sure to take advantage of this retirement plan. Most people underestimate the amount of income they’ll receive in retirement, particularly since they’ll probably have multiple income sources. The tax-free income feature of a Roth IRA is a great way to avoid unexpectedly high tax liability in retirement.

Everyone should have a Roth IRA account, so pick a platform, and get started today!

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*Terms and conditions apply – Stash legal disclosures

This material is not intended as investment advice and is not meant to suggest that any securities are suitable investments for any particular investor. Investment advice is only provided to Stash customers. All investments are subject to risk and may lose value.

¹ Stash does not monitor whether a customer is eligible for a particular type of IRA, or a tax deduction, or if a reduced contribution limit applies to a customer. These are based on a customer’s individual circumstances. You should consult with a tax advisor.

²For Securities priced over $1,000, purchase of fractional shares starts at $0.05.

³The Monthly Wrap Fee starts at $1.00 and you’ll also bear the standard fees and expenses reflected in the pricing of the ETFs in your account, plus fees for various ancillary services charged by Stash.

⁴The adult (or Custodian) who opens the account can manage the money and investments until the minor reaches the “age of majority.” That age is usually 18 or 21, depending on the Custodian’s state. The money in a custodial account is the property of the minor. Money in a custodial account can be used by the parent or legal guardian, but only to do things that benefit the child.

⁵Promotion is subject to terms and conditions.

⁶Before investing in any exchange-traded fund, consider your investment objectives, risks, charges, and expenses.

Money Under 30 is a paid Affiliate/partner of Stash. Investment advisory services offered by Stash Investments LLC, an SEC-registered investment adviser.

Best Roth IRA account for the investor who just cant get going

Stash

StashStash is also a micro-savings app. But it works more directly, enabling you to make regular deposits into your Roth IRA account, rather than using the round-up method.¹ As you move money into your account, the money is invested in stocks or ETFs of your choosing.

Stash offers more than 1,800 stocks and ETFs⁶, which includes different investment themes. Some of those investment themes are based on socially responsible investing. For example, you can invest in the Clean & Green theme, which focuses on clean energy. This gives you an opportunity to invest in a way that’s consistent with your own conscience and beliefs.

IRA accounts, including traditional and Roth IRAs, are available from Stash Retire. You need a minimum of 1 cent to invest in a Roth IRA account.² The ability to start with such a small amount, and to make contributions you’re comfortable with can makes it easier to get into the Roth IRA savings process if you never have before.

Stash is different from other robo-advisors in that it doesn’t actually manage your investment account for you. They provide recommendations based on your investing profile and you are then responsible for managing the investments in the account.

Stash has 3 options for monthly plans: the Beginner option is $1 per month and you have access to a personal investment account³; the Growth option is $3 per month where you also have access to tax benefits for retirement investing³; the Stash+ option³ is $9 per month where you have the option to open custodial accounts (UGMA/UTMA) for up to two kids as well as many other benefits.⁴

Reasons to use Stash

Stash can be a great Roth IRA starter account. Even if you’ve never been able to save and invest money in the past, you can use this application to begin saving small amounts. You need no more than a penny for a Roth IRA account.² On the investment side, Stash provides investment guidance, which will be a benefit to anyone who is not familiar with the investing process.

The main reasons to not go with Stash

If you’re looking for a fully managed investment account, Stash will not provide this service and so for folks who are looking for more hand-holding, you may want to try another option.

Who is Stash best for?

Stash is an excellent starter Roth IRA account. You can start basically with pennies² and begin building your account from there. And even though the service doesn’t provide direct account management, it does provide the recommendations that will enable you to successfully invest.

It’s also a very good choice for any small Roth IRA investor who wants to take part in socially responsible investing.

If you open an account with Stash, Stash will match $5 as long as you deposit more than $5 into your investing account.

Terms and conditions apply*

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.

How Much Money Do I Need to Open a Roth IRA?

The minimum amount to open a Roth IRA varies depending on the financial institution. But many, particularly online brokers, don’t require a minimum amount of money to open an account.

Common questions

When can I access my account?

We’ll send you your account number as soon as your application is completed and approved. You can use your account number to log in and manage your account. 

What are the tax benefits?

With this account, your contributions aren’t tax-deductible – but your earnings grow tax-free and withdrawals can be made tax-free after five years, provided you are age 59½. 

You may be eligible for tax-free withdrawals before age 59½:

  • In case of death or disability.
  • To pay up to $10,000 towards the purchase of a first home.
  • To pay up to $5,000 towards birth or adoption expenses.

While there are no current-year tax benefits, you can contribute to a Roth IRA whatever your age, and you won’t need to take Required Minimum Distributions based on your age.

What are the benefits of a Schwab Roth IRA?

When you open a Roth IRA with Schwab, you get:

  • Investment help and guidance.
  • Retirement planning tools and resources. 
  • 24/7 service and support.
What kinds of investment choices do I have?

Choose from stocks, bonds, ETFs, mutual funds, CDs, and more. Schwab also offers professional portfolio management solutions that can make investing even easier. As a Schwab client, you can speak with a Schwab investment professional who can help you decide which investments are right for you. Just give us a call at 866-855-5635. We’re here and happy to help.

How much can I contribute each year?

You can contribute $6,000 for the tax year 2021 and $6,000 for the tax year 2022 ($7,000 for tax year 2021 and $7,000 for year 2022 if you are at least age 50) or up to 100% of earned income, whichever is less. Income limits apply

What are the eligibility requirements to open a Roth IRA?

There are income limitations to open a Roth IRA account. If you file as a single person and your Modified Adjusted Gross income (MAGI) is above $140,000 for tax year 2021 and $144,000 for tax year 2022 or if you file jointly and you have a combined MAGI above $208,000 for tax year 2021 and $214,000 for tax year 2022, you may not be eligible to start a Roth IRA. See the Roth IRA contribution limits for more information.

Roth or Traditional IRA—what’s the difference?

A key consideration is whether it makes more financial sense to take advantage of immediate tax benefits or enjoy tax-free withdrawals in retirement. With a Traditional IRA, you may get immediate tax benefits, but you’ll have to pay ordinary income tax on your contributions and earnings when you take money out in retirement. With a Roth IRA, there are no immediate tax benefits, but contributions and earnings grow tax-free. All withdrawals can be taken out tax-free and penalty-free providing you’re 59½ or older and you have met the minimum account holding period (currently five years).

Compare a Roth vs. Traditional IRA

How can I open a Roth IRA?

Opening a Roth IRA is fairly straightforward. First, choose a reputable investment firm and make sure their IRA terms, including minimum deposit requirements, match what you need. Fill out their online form. Be prepared with your Social Security number, driver’s license number, employer’s name and address, and beneficiary information.

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