How to open a Roth IRA?

Summary 

What is a Roth IRA? 

A Roth IRA is a retirement account where individuals contribute after-tax dollars.

Although there is no immediate tax benefit while contributing to the fund, when the time comes to withdraw the money, distributions are entirely tax-free.  

There are rules that apply to withdrawals. One of which is that withdrawals can only occur after the account is five years old and the owner is 59 and a half or older. 

One of the primary reasons people want to open a Roth IRA is the ability to have tax-free income when they retire. They may not see the benefit during their contributing years, but when they are no longer working, they owe nothing to the IRS.  

This is especially helpful if they expect their tax rate to be higher in their final working years.

Inflation is relevant here, as money decreases in value over time, and tax rates will likely be higher when a person retires.  

How do I open a Roth IRA? 

There are several steps to opening a Roth IRA:

There are two requirements to qualify for a Roth IRA: 

Even underage children may have a Roth IRA if they have an income from their own small business, such as a lawn-mowing service or paper round.  

Their parents may open a custodial Roth IRA on their behalf. Parents and grandparents may also contribute to their income as a gift. When they reach adulthood, they can transfer the custodial account to a Roth IRA in their own name. 

There is also no upper age limit to opening a Roth IRA. People in their 80s and 90s can contribute to these accounts if they still earn an income. 

The maximum contribution for 2024 is $7,000 for people under 50 and $8,000 for those over 50. 

Eligibility to make Roth IRA contributions is subject to a person's tax-filing status and income. The breakdown is as follows:  

Want to know how much you can get from your Roth IRA at retirement? Check out our free Roth IRA Calculator here>

The second step involves choosing where to open your Roth IRA. Most financial institutions, including banks, robo-advisors, brokerages (online and traditional), and credit unions, offer Roth IRAs.  

Before deciding on where to open a Roth IRA, investors should ask themselves the following questions: 

The Roth IRA is not an investment. You still have to select these.  

Most people fund their Roth IRAs with mutual funds, ETFs, stocks, bonds, exchange-traded funds, or money market funds. 

Once you're ready to open the Roth IRA, the paperwork begins. You can typically find the relevant forms online, but ensure you have all the relevant documentation and information for a smooth process.  

This will include: 

When deciding on investments, there are three main routes: going solo, purchasing a target-date fund or life cycle fund, or relying on a financial advisor to do the job for them. 

Some people feel confident and knowledgeable enough to design their own portfolios. If you choose this option, it's essential to diversify the portfolio by allocating specific amounts to riskier investments and how much to invest in low-risk options.  

Another option is the target-date fund, which automatically adjusts to safer investments as investors near their retirement age. The target date can range from 10 to 40 years from the present, ideally matching the time they retire. 

Some people may need comprehensive assistance to plan their retirement funding. It is always wise to seek financial advice from credentialed financial advisors and Unbiased can help with this. 

Although you can invest a lump sum into your Roth IRA or contribute any time during the year, it's wise to work your Roth IRA contributions into your monthly budget.  

The maximum contribution for the year, $7,000, works out to $583 over twelve months. If this is unaffordable, contribute as much as you can. 

It is best to make regular contributions because once you set up the deductions, you no longer have to make plans to build your account. You will quickly get used to your new budget while your account steadily grows – tax-free. 

Is opening a Roth IRA free? 

There are no official costs to open a Roth IRA.  

Still, other fees and charges may be in place depending on the financial institution and the products chosen. 

Can you have multiple Roth IRAs? 

It is possible to have multiple Roth IRAs, but the contribution limits remain the same.  

You may contribute a maximum of $7,000 across the various accounts, not per account. 

Does opening a Roth IRA affect your credit score? 

When you open a Roth IRA, it should not affect your credit score.  

Investment is not considered a risky or irresponsible financial practice.  

It will also not elevate your score. 

What happens after I open a Roth IRA? 

Once you've opened your Roth IRA, it's wise to keep your investments for the long term.  

However, you should regularly review your account statements and decide whether your investment choices still serve your purposes.  

Depending on their performance, you may want to sell and purchase specific investments to rebalance your account. 

Get expert financial advice 

Knowing how to open a Roth IRA and doing so is a great way to plan for retirement.  

While you don't receive any tax benefits while contributing to the investment, you will reap the benefits of tax-free withdrawals and distributions when your income needs to stretch as far as possible in your golden years.  

If you're wondering when to open a Roth IRA or need comprehensive financial advice for your retirement planning, it’s always best to seek advice from a professional, expert financial advisor.  

Let Unbiased match you with an SEC-regulated financial advisor who can help you build a financially secure future.  

Find a financial advisor today.