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How to Open a Roth IRA: A Complete Step-by-Step Guide

Follow this guide and learn how to open a Roth IRA in just a few minutes so that you can begin investing for retirement right away.

When you’re ready to start building retirement savings, you have several options to choose from.

One of the most straightforward options most people have access to is opening a Roth IRA account.

These accounts can be opened on your own without a workplace offering them as a benefit.

You can choose where you want to open it and what you want to invest in. If a Roth IRA sounds like it might be a good fit for you, here’s what you need to know about how to open a Roth IRA.

What You Need to Open a Roth IRA

Opening a Roth IRA is a relatively simple process.

That said, it helps to know what you need to open an account.

Documents and information to gather:

  • Name
  • Address
  • Social Security number
  • Driver's license or passport
  • Your bank account number and routing number
  • Full name and Social Security number of any beneficiaries

Since this account has tax impacts, you’ll need to provide your Social Security Number.

You may have to verify your identity by providing your driver’s license or passport, as well.

To fund the account, you’ll need to provide your bank’s routing and account number.

When setting up the account, you can designate a beneficiary. This is the person that will get your account if you pass away.

You’ll ideally need their name, Social Security Number and address.

Do you qualify for Roth IRA contributions?

Of course, you’ll want to make sure you qualify to contribute to a Roth IRA before you open an account.

In general, you or your spouse must have earned income to be able to contribute.

You must also fall below the maximum income limits to contribute to this account type. If you exceed the limits, you may qualify to contribute to a traditional IRA instead.

Picking the Right Brokerage for You

Once you have gathered the information you need to open a Roth IRA, you have to choose where you want to open it.

Several institutions offer Roth IRA accounts. These may include:

  • Banks
  • Financial advisors
  • Brokerage firms
  • Financial apps

Banks typically offer both savings accounts and investments like mutual funds in their Roth IRAs.

Most other institutions focus on offering several investment options, such as mutual funds, exchange-traded funds (ETFs), stocks, bonds and more.

You have to evaluate where to open your account on several factors.

First, you should make sure the brokerage offers the type of investment you want to invest in. If they don’t, keep looking for another option.

Next, look at the fees the brokerage charges. Ideally, you want to minimize fees so you can keep as much of your money working for you.

Another important factor is convenience.

Some apps make it extremely easy to invest in a Roth IRA, while other firms are more traditional and a bit more challenging to understand.

Finding one that fits your style is essential to keep you investing.

You’ll also want to look at any minimum initial investment requirements a brokerage may have for you to start investing.

Traditional mutual funds often have a minimum amount required to invest in them, such as $1,000 or $3,000. Investing in ETFs or stocks often requires much lower minimums of just a single share.

Some brokerages even allow you to invest in partial shares with however much money you have available to invest. Once you narrow down your list to a couple of choices, compare them.

Figure out which is best for you. Then, it’s time to open an account.

How to Open a Roth IRA at the Brokerage You Choose

The process of opening a Roth IRA account at the brokerage you choose usually isn’t complex.

In fact

It can take as little as a few minutes for some brokerages.

Today, opening a Roth IRA account is almost always done electronically.

This means you can typically open an account from the comfort of your home.

If you choose to open your Roth IRA on an app-based brokerage, you may need to download the app first.

For other brokerages, you may simply have to visit their website and create an account.

Once you have an account created, you must provide your basic personal information. This includes your name, birth date, Social Security Number and more. You may also have to verify your identity by uploading a picture of your driver’s license or passport.

At some point in the process, the brokerage will ask how you want to fund your account.

Most people provide a bank routing and account number to do this.

Then, the brokerage asks what you’d like to start investing in. You usually choose from a mutual fund, ETF, or other investment of your choice. You may even make your first investment right after opening your account.

Starting to Invest

Once your account is open, it’s time to start investing.

Depending on the brokerage you chose, you can do this in different ways.

Some people like complete control over their money. In this case, you may want to buy and sell investments within your account manually when you choose.

For others, automating the process of investing for retirement makes sure it gets done. Most apps and brokerages allow you to set up automatic investments. These recurring transfers can purchase a particular amount of an investment on a set schedule.

Many people set this up to come out of their bank account after each payday.

If you want to max out your Roth IRA, you’d simply divide the amount you can contribute over a year by the number of investments you plan to make.

If you don’t exceed income limits, you generally can contribute $6,000 in 2021. People age 50 or older can contribute $7,000. If you’re under age 50, can contribute the full $6,000 and plan to make 24 contributions over a year, each automatic contribution would be $250.

Why You May Want a Roth IRA Over a Traditional IRA

Choosing between a Roth IRA and a traditional IRA requires some thought.

These two tools work very differently for retirement planning purposes.

Roth IRAs allow you to make contributions post-tax.

This means you don’t get a deduction for making contributions. The good news is qualifying withdrawals in retirement are tax-free. Your earnings are also tax-free.

This means you only pay tax on the money when you contribute, assuming you follow the rules.

Traditional IRAs work differently.

You may get a tax deduction on your contributions today. The earnings grow tax-free in the account. Unfortunately, you have to pay ordinary income taxes on all withdrawals in retirement.

Using a Roth IRA can help you plan because you get to keep all of the money in the account.

This issue isn’t an all-or-nothing decision, though. It often makes sense to have funds in both Roth and traditional accounts at retirement to help with tax optimization strategies.

Benefits of a Roth IRA

Grows tax-free: Earnings in your Roth IRA don’t require you to pay taxes. If you invested in a taxable retirement account and received dividend distributions, you’d have to pay taxes on those as you receive them.

Withdrawals in retirement (after age 59 and ½) may be tax-free: As long as your account meets the rules, your withdrawals after retirement age should be tax-free.

No required minimum distributions: You don’t pay taxes when you withdraw funds so there are no required minimum distributions with a Roth IRA.

Catch-up contributions: If you’re age 50 or older, you can contribute an additional $1,000 to your Roth IRA each year.

Drawbacks of a Roth IRA

Contribution limit: Roth IRA contributions are limited to $6,000 per year if you’re age 49 or younger. This is much smaller than a Roth 401(k)’s contribution limit.

Income limit: To contribute to a Roth IRA, your income must fall below the income limit. You may be able to get around this through a backdoor Roth IRA or a mega backdoor Roth IRA, though.

Early withdrawal penalty: If you withdraw non-eligible funds before retirement age, you may have to pay a 10% penalty and may owe income tax on the earnings withdrawn.

Must hold the Roth IRA for five years before withdrawing in most cases: To withdraw contributions and earnings tax-free, you have to hold an account for at least five years.

Consult a Professional

If you’re unsure about the process of opening a Roth IRA, you can consult a professional.

Many brokerage firms have customer service numbers you can call to get help with the process.

However, some people may not be sure if a Roth IRA is right for them. In these cases, you need someone to look at your financial picture to give you useful advice. You could consult any financial advisor, but many work for commissions. Due to this, they’re almost always going to recommend for you to invest with them. To avoid this conflict of interest, consider consulting a fee-only fiduciary financial planner. You do have to pay these advisors for their time. The benefit is they do not accept commissions. If they charge an annual fee or an hourly rate, they don’t get compensation for the assets they manage for you. This would remove any potential conflict of interest in advising you to invest with them. It comes at a cost, but it is truly objective advice that is in your best interests.

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