You are probably aware of the importance of saving for retirement through a tax-advantaged retirement account. One of the best ways to grow your wealth efficiently is to do so with a Roth IRA which grows tax free — you put after-tax dollars into an investment account, and when it comes time to withdraw the money, you are not taxed on it. A Traditional IRA is another good choice. It lets you take tax deduction now and grows tax-deferred.
Opening a Roth IRA
1. Make Sure You’re Eligible
Before you start, make sure you are eligible. Some basic requirements are:
- You have taxable income in the year you’re contributing
- Make sure you are under the income limit. Roth IRA also has income limit with phase out between $122k to $137k for single filer and $193k to $203k for married couple (source: Vanguard).
2. Choose an Investment Broker
If you are eligible to open a Roth IRA account, it is actually fairly easy to get it done. Most online brokers and discount brokers will let you do everything via the Internet, with no need to mail anything in. You can also visit a local brokerage office, or check with your insurance agent or bank representative, and open a Roth IRA in person.
When you go to open your Roth IRA, whether you do it online or in person, you will need this information:
- Your Social Security Number
- Employment information
- Bank account information
The whole process of opening a Roth IRA takes about 15 minutes. You answer a few questions, and it’s less painful than filling out a job application or a credit application. It only took about 10 minutes to set up my husband’s account online..
3. Make Your Initial Deposit
For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year, whichever is less (source: IRS.gov).
If you can’t contribute the full amount, most brokers have a lower opening deposit, or you can set an automatic investment plan so that you are investing the same amount of money every month (most often as little as $50 per month).
Automating the process is a good way to ensure that you continue making contributions and get into the habit of saving for retirement. In order to reach the $6,000 maximum, you will need to put in $500.00 each month ($583.33 if you are at least 50 to reach the $7,000).
4. Choose Your Investment Options
Next, you need to consider what kind of investments you want in your Roth IRA.
Most people invest in stocks through mutual funds and index funds. However, it is possible to use a Roth IRA account to invest in cash, bonds, real estate, commodities and just about anything else. Assess your risk tolerance and retirement goals to help you decide what investments should be included in your Roth IRA.
If you have more than one investment accounts, your asset allocation should be determined holistically with all accounts included, and your IRA investments should take advantage of the tax-free or tax-deferred growth nature. For example, dividend paying and income generating investments are ideal for IRA because you don’t have to pay annual taxes.
5. Set Up a Plan for Future Contributions
If you didn’t set up an automatic investment plan, you should set up a plan with your broker to regularly contribute to your IRA and ensure that you don’t exceed the maximum limit.
6. Set Up a Rebalancing Plan
You should also set up plan to periodically review you investments and asset allocation, e.g., quarterly or yearly, or based on a percentage change in your portfolio. Once you have a plan, set up reminders on your calendar.
Opening a Traditional IRA
If you decides that you should open a Traditional IRA instead of a Roth IRA, you can follow the same process as outline above (you just have to indicate that you want to open a Traditional IRA instead).
For Traditional IRA
- Contribution Limit – The same contribution limit applies.
- Retirement Plan at Work – Your deduction may be limited if you (or your spouse) are covered by a retirement plan at work and your income exceeds certain levels (source IRS.gov)
- No Retirement Plan at Work: Your deduction is allowed in full if you (and your spouse) aren’t covered by a retirement plan at work.
If you have an opportunity to open an IRA account, it is a great financial move and you should definitely do it. Follow the simple steps above to open your IRA and get started with your retirement investing today.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.