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A Roth IRA is an individual retirement account that allows you to grow your money and withdraw it tax-free.

For modified adjusted gross incomes of less than $140,000 (single filers) or $208,000 (married filers), the contribution ceiling in 2021 is $6,000 ($7,000 if 50 or older) (married filing jointly). People who are 5912 years old or older and have held accounts for at least five years are eligible to withdraw funds without paying federal taxes.

How should a Roth IRA invest for beginners?

You pay taxes on your investment upfront, let it compound, and take tax-free withdrawals in retirement. You can even take money out of a Roth IRA in an emergency, though it’s typically better not to do so during your working years unless you’ve exhausted all other choices.

The Roth IRA has several advantages, including:

  • Potential tax savings. Roth IRAs may be worthwhile if you expect your tax rate to rise in the future. Here’s why you pay taxes on your Roth IRA contributions now rather than later, when your tax rate may be greater. If your tax rate is lower today, paying taxes in exchange for tax-free retirement withdrawals makes sense.
  • Easy withdrawals. You can take your money out whenever you choose, without incurring any taxes or penalties. (Withdrawing investment earnings may result in taxation or penalties.)
  • Double dipping. You can contribute to a Roth in addition to a 401(k).
  • Flexible timing. You can contribute to a Roth IRA whenever you want and for as much as you want. You could, for example, make a $6,000 contribution on the first day of the year or spread it out over several months.
  • Extra time to contribute. To contribute during the preceding calendar year, you have until the tax deadline.
  • Tax-free distributions. You can take distributions, including earnings, from a Roth IRA without paying federal taxes once you reach the age of 59½ and have held the account for at least five years.
  • No age limit to open. You can start a Roth IRA at any age as long as you have a source of income (you can’t contribute more than your source of income).
  • No required minimum distributions. Starting at age 72, Roth IRAs are exempt from the required minimum distributions to traditional IRAs and 401(k)s.

Where and how should I open a Roth IRA account?

Most banks, credit unions, and other financial institutions offer IRAs. However, online brokers, mutual fund providers, and other financial businesses like Vanguard and Fidelity provide IRAs.

A Roth IRA is a true gift to retirees: you pay taxes on your contributions upfront, let your investment compound, and then take tax-free withdrawals in retirement.

The following is a step-by-step tutorial to set up a Roth IRA:

1. Check to see whether you’re eligible.

Income limits apply to Roth IRAs, which may limit or eliminate your ability to contribute to one. For modified adjusted gross incomes of less than $140,000 (single filers) or $208,000 (married filers), the contribution ceiling in 2021 is $6,000 ($7,000 if 50 or older) (married filing jointly). If your income exceeds those thresholds, you can use the backdoor Roth IRA technique to start a Roth by converting funds from a regular IRA.

2. Make a decision about the type of investor you are.

Eligible? Awesome. Take a moment to explore your investment preferences.

Choose a brokerage if you’re a “do-it-yourself” investor. An online broker can help you open a Roth IRA and then let you choose your investments. You can establish a diverse portfolio with just three or four mutual funds, which may be easier than you think. Examine trade commissions and investment costs while comparing brokers (also called expense ratios).

Choose a robo-advisor if you’re a “manage it for me” investor. You can start a Roth IRA with a robo-advisor if you’d rather have someone else decide your investment portfolio for you. Robo-advisors are online services that help you create and manage a diverse portfolio. You pay a small price for the service, but it is usually far less than what a human, financial counsellor would charge.

3. Select a Roth IRA provider and open your account.

Finding a home for your Roth IRA is the next stage in the process.

As a “do-it-yourself” investor, finding the best Roth IRA brokers might be difficult.
Opening a Roth IRA with an online broker makes a lot of sense for consumers who wish to pick their own investments. At the finest brokers, you’ll discover an extensive selection of low-cost investments, such as index mutual funds and exchange-traded funds. The best brokers also provide a wealth of retirement planning resources, excellent customer service, and low account minimums and fees. You also have complete control over the investments made with your retirement savings.

As a “manage it for me” investor, finding the finest Roth IRA robo-advisors might be difficult.
A robo-advisor is an obvious solution for folks who want to invest for retirement but don’t want to bother about monitoring their portfolio over time. Generally, robo-advisors use investing professionals in creating several portfolios tailored to various investor types. Some robos provide portfolios that range in risk, with “aggressive” options for those who wish to invest a large portion of their portfolio in equities and “conservative” options for those who prefer a less volatile investing account.

4. Choose your assets carefully.

The final step in learning how to start a Roth IRA is deciding where to invest the funds.

A Roth IRA is a savings account rather than an investment. Contributing is only the first step, and you must invest that money if you wish to accumulate riches over time.

If you want to be a hands-off investor, a robo-advisor can pick a balanced investment portfolio for you.

If you’re a do-it-yourselfer, you can acquire that diversification for less by putting together a portfolio of index mutual funds and ETFs. To do so, decide how much of your money you want to put into riskier assets, such as stock funds, and how much you want to keep relatively safe, such as bond funds and cash. This mixture is referred to as your asset allocation.

What is the lowest amount to start a Roth IRA?

The good news is that there is no minimum amount required to open a Roth IRA with the IRS. According to IRS guidelines, while there is a maximum Roth IRA contribution amount, there is no minimum. The bad news is that some providers have account minimums to start investing, so if you only have $50 or less, look for a service that doesn’t. Keep in mind that many mutual funds need a minimum commitment of $1,000 or more, so your options for investments may be limited if you don’t have that much. Even yet, there are many investments with no or modest account minimums.