So, you’re ready to start saving for retirement and you’ve decided you want to open a Roth IRA. What a great idea!
Why Start a Roth IRA?
There are several reasons why opening a Roth IRA is one of the top ways to save for retirement. Here are three of the best ones:
- Your investments grow tax-free. That’s right! You’ll have to pay taxes on the money you put into a Roth IRA, but you won’t pay a dime of taxes on any of the growth.
- You’re in control of your investments. When you invest in a workplace retirement plan, like a 401(k), you’re limited to the types of funds and other investments they offer. With Roth IRAs, you get to choose your own investments. (We’ll talk more later about which ones to pick.)
- Almost anyone can open one. Anyone who doesn’t exceed the income limit (more on that later) can open a Roth IRA. That means it’s a great retirement savings option for people who are self-employed or anyone who works for a company that doesn’t offer a retirement plan.
How to Open a Roth IRA
Opening a Roth IRA is actually pretty simple! Just follow these six steps.
1. Find out if you’re eligible and ready.
First things first: Before you can open a Roth IRA, you have to make sure you don’t exceed the income limits to contribute to a Roth IRA.
In 2023, as long as your adjusted gross income is less than $138,000 for single filers and $218,000 for married couples filing jointly, you can open and contribute to a Roth IRA.1
But eligibility isn’t the only thing you should keep in mind before diving into mutual fund investing—you also need to make sure it fits into your budget.
Before you start investing for retirement in a Roth IRA, there are two other important financial goals you should tackle first. First, if you have any debt (other than a mortgage), you should focus on paying it off before you begin investing. Second, you should build a full emergency fund worth 3–6 months of your typical expenses. Prioritizing those money goals ahead of retirement investing will lay an important foundation for the rest of your life!
You should also wait to invest in a Roth IRA until you’ve taken full advantage of any 401(k) match your company offers. Once you’ve done that—and you’re debt-free with an emergency fund—you’re ready for a Roth IRA.
2. Decide how to manage the account.
Up next, you’ll need to decide how to manage your Roth IRA. Specifically, you’ll need to decide who will manage it. You basically have two options: You can manage everything yourself (bad idea!), or you can work with an investing professional.
Hear us on this: Even if you feel confident enough to go the DIY route with your Roth IRA and manage the investments on your own, you should still get some advice from an investment professional. They’ll walk you through the process of setting up your retirement accounts and help you pick the best individual investments. You’ll probably also have questions that a search engine or an online chatbot can’t answer.
And if you’re worried about not being in control of your money, don’t be. A good investment pro will provide you with guidance and advice, but they’ll ultimately leave the decisions up to you.
Our SmartVestor program can connect you with an investment pro who can help you make sense of your investing options.
3. Fill out the forms.
Regardless of 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 Roth account. Make sure you’ve got all the information below handy once you’re ready to fill out the forms:
- Your driver’s license or other government-issued form of photo ID
- Your Social Security number
- Your bank’s routing number and your checking or savings account number
- Your employer’s name and address
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 too.
4. Choose investments within your Roth IRA.
Once you’ve opened your account, your next step is to choose what to invest in. That’s because your Roth IRA is not an investment in itself—it only holds your investments and protects them from income and capital gains taxes.
Market chaos, inflation, your future—work with a pro to navigate this stuff.
You can put all kinds of different investments into your Roth IRA, so choosing them is the most difficult step in starting a Roth IRA. There are so many options!
The best way to invest with your Roth IRA is through mutual funds. The great thing about mutual funds is they allow you to spread your investments across a lot of companies, which lowers your risk while still letting your money to grow. (That’s called diversification.) If you put all your eggs in one basket, like with single stocks or cryptocurrency, at some point you’ll end up with a mess on your hands.
Here are some other benefits of mutual funds:
- 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. The stock market historically has an annual average rate of return between 10–12%.2
- Mutual funds are managed by teams of investment pros who make sure the mutual fund performs at the highest level possible. They live and breathe this stuff!
- If you decide to work with a pro to open your Roth IRA and help you choose your mutual funds, the advisory fees 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.
You should spread your investments evenly (25% each) across four types of mutual funds: growth, growth and income, aggressive growth, and international.
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5. Choose investments for the long term.
Investing for retirement is a marathon, not a sprint. Instead of chasing quick returns, you should buy shares of mutual funds and hold them for a long time.
Some years, you’ll see giant returns on your investments, and in other years, you might see negative returns. But keep this in mind: The stock market is a lot like a roller coaster—the only people who get hurt are the ones who try to jump off the ride before it’s over.
People who become millionaires through investing in mutual funds don’t overreact to whatever happens to their investments in any particular year. They don’t pull their money out when the market starts to decline. Instead, they stay focused and keep investing month after month, year after year—no matter what’s happening in the stock market.
6. 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 when it comes to your investing strategy. Yep. It’s called automating your investing, and it’s when you set up payroll deductions, automatic bank withdrawals or direct deposits to fund your Roth IRA.
Remember, though: There are limits to how much money you can put into IRAs each year. Again, for 2023, you can invest $6,500 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 $7,500.3
Setting up automatic IRA contributions is a small extra step that’ll make it so much easier for you to save 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 concert tickets or a new pair of jeans.
But don’t go so far with this idea that you never check in on your investments. You’ve got to make sure your investing plan is still on track so you can make changes if you need to.
- Opening up a Roth IRA is just the beginning. You also need to choose your investments and set up your contributions.
- How much should you invest each month? As a general guideline, we recommend you save 15% of your gross income for retirement. That way, you can build your nest egg while still saving enough for other important financial goals.
- If you’re ready to open up a Roth IRA, the SmartVestor program can connect you with investment pros who can help you make sense of all your options.
This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.