How to open a Roth IRA

Key points

• Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.
• Roth IRAs have yearly contribution limits as well as income limits.
• After you determine your eligibility for a Roth IRA, select a provider whose offerings align with your goals.

When it comes to saving for retirement, a Roth IRA is a great option available to individuals. It’s an account to which you contribute after-tax dollars. Your earnings grow tax-free, and when you withdraw your money in retirement, you won’t have to pay taxes on them. 

But before you can start reaping the benefits of a Roth IRA, you need to know how to open one. We’ll walk you through the basics of opening a Roth IRA so you can start building your retirement nest egg.

What is a Roth IRA? And should you open one?

A Roth IRA is a type of individual retirement account. It has certain characteristics that make it unique. 

Patrick Marcinko, a certified financial planner and associate financial advisor at Bogart Wealth, identifies these characteristics and explains how Roth IRAs work. 

The primary feature of a Roth IRA, Marcinko says, is that contributions are made with after-tax dollars. The benefit of making contributions with money you’ve already paid taxes on is that earnings grow tax-free and qualified withdrawals are tax- and penalty-free.

“The main caveat to the tax benefits of Roth IRAs is that the money must remain in the account until the owner reaches age 59½ and the account has been open for at least five years,” Marcinko adds. 

Roth IRAs have such tremendous tax benefits that the government limits the amount you can contribute to $6,500 per year for 2023, Marcinko says. 

There is also a $1,000 catch-up contribution for savers who are 50 or older, bringing their contribution limit to $7,500 per year for 2023.

So should you jump on the Roth IRA bandwagon? While a Roth IRA is a fantastic retirement tool, it isn’t a one-size-fits-all solution. The decision to open a Roth IRA depends on several factors:

• Your tax situation: If you expect to be in a higher tax bracket when you retire, tax-free Roth IRA withdrawals could be a big advantage. This feature makes the Roth IRA particularly attractive to younger savers, who are typically in lower tax brackets.
• Your access to funds: You need to be comfortable with the idea that the money you contribute to a Roth IRA is, in effect, locked away until you’re 59½ years old. Sure, you can withdraw the contributions — but not the earnings — anytime tax- and penalty-free. But the aim of the game is to let your money grow.
• Your income: There are income limits for contributing to a Roth IRA. For 2023, you can contribute to a Roth IRA if your modified adjusted gross income is less than $153,000 (single) or $228,000 (married filing jointly). 
• Your savings habits: The annual contribution limits — $6,500, or $7,500 if you’re 50 or older — mean you must be diligent and consistent with your savings. If you’re already maxing out your 401(k), a Roth IRA can be another way to boost your tax-advantaged savings.
• Your retirement portfolio: A Roth IRA can help balance to your retirement portfolio, adding tax diversification. Having accounts with different tax treatments can give you flexibility in managing your income and taxes in retirement.

Remember, personal finance is just that: personal. Your friend’s financial plan may not fit your life. And that’s OK. While a Roth IRA can be a phenomenal tool to build wealth, you must ensure it aligns with your financial goals and lifestyle.

Differences between a Roth IRA and a Roth 401(k)

Both Roth IRAs and Roth 401(k)s are funded with after-tax dollars and offer tax-free growth and tax-free withdrawals in retirement. But the main differences lie in their contribution limits and employer involvement:

• A Roth IRA has a lower contribution limit and is funded solely by an individual.
• A Roth 401(k) has a higher contribution limit and is employer-sponsored.

Robert Reilly, a financial advisor and part of the finance faculty at Providence College School of Business, breaks down the differences further. 

The maximum contribution to a Roth 401(k) is $22,500 for 2023, Reilly says, with a catch-up contribution of $7,500 for people who are 50 or older. 

A Roth 401(k) is overseen by your company, which selects the broker and may limit your investment options. It may also offer matching contributions. 

“A Roth IRA allows your investments to grow for a longer period, offers more investment options and makes early withdrawals easier,” Reilly adds. The maximum contribution to a Roth IRA is $6,500 per year for 2023, or $7,500 if you’re 50 or older.

When it comes to deciding between a Roth IRA and Roth 401(k), it’s important to consider your retirement savings goals and the differences between the accounts. A Roth IRA may be a better option for people who want more control over their investments and have lower incomes. A Roth 401(k) may make more sense for those who want to contribute more to their retirement savings and get matching contributions from their employers.

The good news is you don’t necessarily have to choose one over the other. You can save with both a Roth IRA and a Roth 401(k) as long as you’re qualified to do so and don’t run afoul of the contribution and income limits.

How to open a Roth IRA

There are a few simple steps you’ll need to follow if you’re interested in opening a Roth IRA. The process is easy, but it’s important to understand the eligibility requirements for contributing to a Roth IRA and select a provider that offers low fees and investment options that align with your goals. To help you get started, we’ve outlined the steps for opening a Roth IRA below. 

1. Determine your eligibility

To contribute to a Roth IRA, you must have taxable income. That can include wages, salaries, commissions, tips, bonuses or net income from self-employment. Additionally, there are income limits for making contributions to a Roth IRA.

To max out your Roth IRA contribution in 2023, your income must be:

• Below $138,000 if you are a single filer. 
• Below $218,000 if you are married filing jointly or a qualifying widower.

Roth IRA contributions start phasing out above those income levels. They will be completely eliminated once your household income reaches:

• $153,000 if you are a single filer. 
• $228,000 if you are married filing jointly or a qualifying widower.

2. Choose a provider

When selecting a provider for your Roth IRA, consider the fees associated with the account, such as annual maintenance fees, trading fees and expense ratios. 

You will also want to think about investment options, such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). Look for a provider with low-cost, diversified investment options that align with your investment goals and risk tolerance.

3. Open the account

To open a Roth IRA, you’ll need to provide personal information like your name, address, date of birth and Social Security number. You’ll also need to choose a beneficiary for the account, who can be changed at any time. Some providers may require an initial deposit to open the account, while others may not.

4. Fund the account

Once your account is open, you can make contributions by transferring money from your bank account or by rolling over funds from another retirement account, such as a traditional IRA or a 401(k). Don’t forget that there is a Roth IRA contribution limit, which is $6,500 in 2023, or $7,500 for people who are 50 or older. 

Where can I open a Roth IRA?

Roth IRAs can be opened at various financial institutions, including banks, credit unions, online brokerages and robo-advisors. When choosing a provider for your Roth IRA, consider the fees, investment options and customer service offered by each institution to find the one that best fits your needs.