One of the most basic hurdles to saving for retirement is the simple act of opening an investing account, like our favorite option, a Roth IRA. It can feel like uncharted territory with all the paperwork and unfamiliar financial terms. But don’t let fear of the unknown keep you from your retirement goals. Starting a Roth IRA is as easy as opening a checking account. And it’s an ideal way to save your money for retirement.
We'll show you how to start a Roth IRA in a minute. But first, let us tell you why it’s such a great tool for retirement savings.
Why Open 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.
IRA stands for individual retirement agreement, and there are two types: traditional and Roth. The big difference between a traditional IRA and a Roth IRA—and it’s a big one—is how they’re taxed.
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You fund a traditional IRA with pre-tax money, meaning that you don’t pay taxes now, but you will pay taxes later. 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.
When you hear the word Roth, we want you to think happy, because a Roth IRA allows your money to grow tax-free!
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 $7,000.1
There’s also a limit on who can contribute to a Roth IRA based on your income. In 2021, as long as your 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.2
How to Start a Roth IRA
Opening a Roth IRA can be as simple as visiting your bank’s website and filling out an online application. If your bank doesn’t offer Roth IRA accounts, you can open one with a brokerage firm. Most large firms also offer online access to start the account application.
But you don’t have to handle the process on your own. In fact, the best way to start a Roth IRA is to talk with your investment professional. If you don’t have one, reach out to a SmartVestor Pro in your area who is committed to educating and empowering you to make the best decisions as you plan for your retirement future.
You can also ask your HR department at work if your company offers financial advising services for their employees.
What You Need to Start a Roth IRA
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 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. You’ll need their name, Social Security number and date of birth.
What Investments Should Be in 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. A lot of people don’t know this, but 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:
- Many mutual fund companies will allow you to start investing through your Roth IRA with as little as $50 per month, so there’s no need to put off opening your account until you have "enough money" to start investing.
- 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 whose job is to 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 that 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, large-cap, equity or growth 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.
- 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.
Also keep in mind:
- Never invest in anything you don’t understand. That includes how much you’re paying and why. You are 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.
How to 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.
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.
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 an 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.