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Retirement

How to Start a Roth IRA

It’s that nagging thought that pops into your mind whenever you think about the future: I need to save for retirement. It’s easy to ignore. And maybe you’ve put it off for another day because you don’t know where to start.

Well, today’s the day to start!

One of the best ways to start planning for retirement is to open a Roth IRA. IRA stands for individual retirement account, and there are two types: traditional and Roth. We recommend a Roth IRA because it allows your investments to grow tax-free!

If you’re already feeling overwhelmed, don’t worry. We’re going to guide you through how to open a Roth IRA and how it can change your future.

How to Open a Roth IRA

If you’re hesitant to open a Roth IRA because you’re stressed about not knowing where to start, don’t be. Opening a Roth IRA is as simple as opening a checking account or contacting a financial advisor. Many banks offer Roth IRAs through an online application. You can also open a brokerage account with an investment firm (online or in person).

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If you’re already invested in a 401(k) plan at work, you can usually set up a Roth IRA with the same firm that manages your 401(k). This will let you manage your retirement investments all in one place. And bonus: If you use the same firm, you won’t have to create an account with another company and think up a new username and password (because 123456 won’t cut it).

Here are five steps on how to open a Roth IRA.

1. Find Out if You’re Eligible and Ready

First thing’s first. Before you can open a Roth IRA, you have to make sure you meet the income limits to contribute to a Roth IRA.

In 2021, as long as your adjusted gross income is less than $125,000 for single filers and $198,000 for married couples filing jointly, you can contribute the maximum amount into a Roth IRA.1 We’ll go over those contribution limits in just a bit.

But eligibility for an IRA shouldn’t be your only consideration. You should also consider whether or not saving for retirement fits into your budget. Before you begin investing in an IRA, we recommend paying off all of your debts (except for your house) and saving three to six months of expenses for an emergency fund. We call this Baby Step 3. Baby Step 4 is investing 15% of your household income for retirement.

2. Choose Where You Want to Invest

Like we said above, you have quite a few options for how to set up a Roth IRA. A lot of what you decide depends on how comfortable you are doing things on your own. If DIY is in your DNA, then go online and set up a Roth IRA.

Odds are, you probably have questions a chatbot can’t answer. If you feel more comfortable working with someone face to face, reach out to a SmartVestor Pro. They’re RamseyTrusted investing professionals who can guide you through all your retirement options, including setting up a Roth IRA.

3. Fill Out the Forms

Whether you work with a pro or sign up on your own, you’ll have some paperwork (or online forms) to fill out to open your account. You’ll need the following information to complete the process:

  • Your driver’s license or other government-issued form of photo identification
  • Your Social Security number
  • Your bank’s routing number and your checking or savings account number
  • Your employer’s name and address (optional)

You’ll also choose a beneficiary (or beneficiaries) who will inherit your Roth IRA if you die. You’ll need their name, Social Security number and date of birth.

4. Choose Investments Within Your Roth IRA

Remember: Your Roth IRA is not an investment in itself—it only holds your investments and determines how those investments are taxed. You can put all kinds of different investments into your Roth IRA.

So, once you’ve opened your account, your next step is to choose what to invest in. This is by far the most difficult step in starting a Roth IRA, especially if you’re unfamiliar with investing terms.

We recommend a mix of mutual funds for your Roth IRA for several reasons:

  • Mutual funds allow you to use the power of the stock market’s long history of growth without taking on the risk of single stock investing. 
  • Mutual funds are managed by teams of investing professionals who make sure the mutual fund performs at the highest level possible. 
  • If you decide to work with an investing professional to open your Roth IRA and choose your mutual funds, the up-front commissions pay for your pro’s time and expert advice—not just at the time you open your account, but for as long as you invest in your Roth IRA.

When you’re choosing your mutual funds, we recommend investing in funds with a long history—10 years or more—of strong returns. You’ll also want to spread your investments evenly across these four types of funds:

  • Growth and Income: These funds have a history of stable growth and also pay dividends. You might find these listed under the large-cap or large-value fund categories. They can also be called blue chip, dividend income or equity income funds. 
  • Growth: These funds are made up of medium or large U.S. companies that are still growing. These funds are more likely to ebb and flow with the economy. They can also be called mid-cap or equity funds. 
  • Aggressive Growth: These funds are the wild child of your portfolio. When these funds are up, they’re really up, and when they’re down, they’re really down. Aggressive growth funds normally invest in smaller companies. 
  • International: These funds give you a chance to invest in big non-U.S. companies you already know and love. These are great because they spread your risk beyond U.S. soil. That way, your retirement fund doesn’t totally tank if America goes through an unexpected downturn. They’re also called foreign or overseas funds.

how to start a roth IRAAlso keep in mind:

  • Never invest in anything you don’t understand. That includes how much you’re paying in fees and whyYou’re the CEO of your financial future, so take charge of your mutual fund education. Understand how they work, how much they cost, and how the cost will affect your savings long term. 
  • Don’t chase returns. Before you commit to a fund, take a step back and look at the big picture. How has it performed over the past five years? What about the past 10 or 20 years? Look for mutual funds that stand the test of time and continue to deliver strong long-haul returns. 
  • Leave your investments alone. When the stock market slumps, you might be tempted to raid your Roth IRA out of fear. Don’t do it! Not only will you owe taxes on the money you take out, but you’ll also get smacked with an early withdrawal penalty. When you invest, you have to think long-term and wait patiently for your nest egg to grow.

5. Set Up Contributions to Your Roth IRA

Ever heard the phrase, “Out of sight, out of mind”? You can actually use this principle in your favor! How? By automating your investing. You can set up payroll deductions, automatic bank withdrawals or direct deposits to fund your Roth IRA.

But hold up. There are limits to how much money you can put into IRAs each year. For 2021, you can invest $6,000 in either a traditional IRA or a Roth IRA. If you’re 50 or older and need to catch up, you can add an extra $1,000 for a total of $7,000.2

When you set up your Roth IRA, you can arrange to have the money you invest in it taken directly out of your checking account. It will require an extra step in paperwork, but it’s worth the time to ensure that you’re putting away money for retirement consistently. And because you never see that money, you won’t even miss it! Plus, you won’t be tempted to use it to pay for new tires or a new pair of jeans.

Why Start a Roth IRA?

A Roth IRA is a great way to supplement your 401(k) or other workplace retirement plan. 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. 

You fund a traditional IRA with pretax money, meaning that you don’t pay taxes now, but you’ll pay taxes when you withdraw money in retirement. But 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—you’ve already paid taxes on it.

Start Investing Today!

Starting a Roth IRA is easier than you thought, right? Now, go get that paperwork and get started!

Want to partner with an investing pro but don’t know where to start? Our SmartVestor program can connect you with a RamseyTrusted investing pro who can sit with you and make sense of your investing options. It’s an easy and free way to find investing help near you.

Find your SmartVestor Pro today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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