How To Start A Roth IRA
If you want to start a roth IRA is can be done in just a couple steps. You have options for the type of investments your IRA uses, and can select the provider you want when setting it up. Start a Roth IRA:
- Determine if you should start a Roth IRA
- Determine if you meet eligibility requirements
- Choose which investments to use
- Choose a provider to help you start a Roth IRA
Determine If You Should Start A Roth IRA
For most investors, an IRA represent a better deal than a Traditional IRA or 401k plan. For starters, Roth IRA distributions are completely tax-free after age 59 1/2 assuming you’ve held the account for at least five years. That said, if you think you may be in a significantly lower tax bracket once you retire, a Traditional IRA or 401k probably makes more sense.
Determine If You Meet Eligibility Requirements
While most people are eligible for an IRA, not everyone will be able to open one. The requirements for opening an IRA are that you’ve earned a modified adjusted gross income under specified limits which change from one year to the next ($120,000 for single filers and $176,000 for joint filers).
Choose Which Investments to Use
As with any type of investment, you’ll want to consider your options carefully when selecting investments to start a Roth IRA. The closer you are to retirement, the less risk you will want in your portfolio. Consider how much money you have available to invest, how much time you can leave the money in the IRA before you need to use it, and what other types of investments you may already have. Generally, the best Roth IRA rates will come from stocks over long periods of time. But stocks are volatile, so you’ll probably want to own some bonds as well. The basic rule of thumb is that you should own your age in bonds, so a 40 year old investor would have about 40% of her portfolio in bonds.
If you are young and have many years before you will retire, it may be a good idea to consider some higher risk investments with the potential to earn higher rewards because you have more time for your money to recover if the market takes a dive. If you do choose some higher risk investments, make sure to balance it with something low risk, too.
Choose a Provider to Open the Roth IRA
You can choose from banks, brokers, insurance companies or mutual fund companies to help you start a Roth IRA. Before selecting a provider, ask what their fees are or if they require that you start a Roth IRA with a minimum amount. There are no federal requirements for a minimum opening balance to start a Roth IRA, but each provider may have their own limit.
