If you’ve found this article, chances are you already know what a Roth IRA is, and how it can completely revolutionize your retirement investing. Opening and contributing to a Roth IRA is one of our top financial priorities, because this tool can help you to save and invest more money for retirement, and enjoy that growth tax free in the future.
Even if you aren’t able to contribute a lot right now, just opening a Roth IRA can jumpstart your retirement investing journey. Every dollar you contribute will directly improve your future finances, and leave you more prepared for those golden years.
Getting started is the most important step you can take. Luckily, Roth IRAs are typically free to open, have no account fees, and you can knock this task out in just a few spare minutes today.
What is a Roth IRA?
A Roth IRA is a type of individual retirement account that you can use to save and invest for your future. Unlike a traditional IRA, you contribute after-tax dollars. The cool part is that when you withdraw those funds in retirement, you can withdraw your earnings tax free. Pretty cool, right?
Roth IRAs also have a ton of unique benefits that make it one of our favorite investment vehicles. For example, you can withdraw your initial contributions without penalty or tax liability at any time. While we recommend keeping your money invested until you retire and not touching your retirement contributions, your Roth IRA can serve as an additional emergency fund (a back up to the back up, if you will) and provide you with additional peace of mind.
Once you turn 59 ½ you can withdraw everything in your account tax free!
Pro Tip – For a more in depth look at the ins and outs of the Roth IRA, I highly suggest giving our post, “The Beauty of the Roth IRA” a read through!
How to Open a Roth IRA
Opening a Roth IRA is a simple process, which shouldn’t take longer than an hour. Follow these steps to open up a Roth IRA with ease and start investing for your future.
Step 1: Make Sure You’re Eligible
Not everyone is eligible to contribute to a Roth or Traditional IRA. To take advantage of these retirement accounts, you must have earned income in a year. You cannot contribute more than you earn. Also, there’s an income threshold to utilize a Roth IRA.
In 2024, if you earn less than $146,000 (or $230,000 for a married couple filing taxes jointly) you can contribute the full amount. This is $7,000 to your Roth IRA each year. If you make more than that, but less than $161,000 (or 240,000 for a married couple), you can still contribute, but your maximum contribution will be reduced. Anything above these figures, you won’t be eligible to contribute to a Roth IRA at all. Cue the sad face emoji!
Pro tip: If your income is too high, you might be able to indirectly contribute to a Roth IRA using a strategy called the Backdoor Roth IRA. However, this strategy can be a little tricky and takes some planning. It might be a good idea to consult a tax pro before attempting this on your own.
Step 2: Pick a Broker
Now, it’s time to pick a broker that will host your Roth IRA account. There are a ton of different brokers to choose from, but here are a few things to keep in mind as you decide which will be right for you:
No Account Fees- If you know anything about How To Money, you’ll know that we hate fees. Account fees can eat into your investment profits, so it’s important to pick a broker who obliterates those fees.
Low Fund Management Fees. In addition to avoiding those account fees, many brokers are now offering extremely low (or zero) cost fund management fees. Some of our favorite Fidelity index funds have 0% fee, while some Vanguard ones have small 0.04% fee. Meaning, if you had $100k in your account, you’d only be charged $40 a year. Do some digging and pick a broker with the lowest management fees you can find. The less you pay in fees, the more money you get to keep.
Brokers we love:
Actually, we’ve done all the hard work for you. In our opinion, you can’t go wrong with any of these low cost brokers below.
There are other worthwhile brokers to consider. Betterment, for instance, is a fantastic roboadvisor worth considering. But again, the goal is to open an account that has NO account fees, no trading fees, and the least possible fund management fees.
Another thing to consider is if you have any existing accounts with these firms. If your company 401k is already managed by Fidelity, Vanguard, or Schwab it’s a win/win to have everything under one roof. The more you can consolidate your financial life, the better.
Step 3: Open a Roth IRA Account
Once you’ve chosen a broker, it’s time to actually open up that account! In order to do so, you’ll need the following information:
- Your social security number
- Name, DOB, Address info
- A driver’s license, or other government ID
- Employer’s name and address
- Your bank account number and routing number (to fund the account)
Once you’ve gathered all your info, just log onto Fidelity, Vanguard or Schwab and select “open an account.” Then, follow the prompts on the websites to open up a Roth IRA. They will likely ask you some questions about your account goals, your income and finances. Answer them to your best knowledge, and you’ll get your account open in no time.
Pssst! Are you setting up a Roth IRA for a minor? → Here’s a guide to investing accounts for kids.
Step 4: Fund Your Account
Now that your account is open, it’s time to transfer some money into it! Even if it’s just $5, making that first contribution is a huge financial milestone. Make sure to celebrate it on the cheap and reward yourself for taking a huge step towards growing your wealth! 🥳
There are a few ways to transfer that money into your account, and I’ll admit- sometimes finding the page to make transfers on these websites can be a little tricky. Here are the guides for transferring money to your account for Vanguard, Fidelity, and Schwab.
Most brokers allow ACH transfers from your bank. These can take 1-2 days to complete, so just be patient while the funds move over. The good news is that you usually only need to set up your bank account info once. After that, making contributions to your Roth IRA is easy.
If you don’t have any money right now to fund your account, that’s okay. Take some time and brainstorm a few ways that you can earn more money, or spend less. A good place to start is with these 7 Ways to Save More Money This Week, or by negotiating a few of your bills!
Not sure how much you should be saving? Be sure to check out our post, “How Much Money Do You Need to Retire? 3 Different Strategies to Calculate.“
Step 5: Automate Future Transfers
Most brokers will allow you to set up automatic, recurring transfers. This is great for folks who want to pay themselves first every month and save for retirement without even thinking about it.
When the same amount of money is deducted from your bank account on a regular basis, it removes the need to decide how much you will contribute every month, freeing up precious mental energy. This means less stress!
You’re also likely to save more by automating your contributions because you’ll be “paying yourself first.” Essentially, you’ll make that transfer for the first of the month, or right after you get paid. Paying yourself first forces you to prioritize saving and investing, before spending on other purchases. And that means future you will have more money and financial flexibility.
Automating transfers can also help you to max out your accounts. For example, if you would like to max out your Roth IRA for 2024, just set up an automatic transfer of $583 each month. Or for folks over 50 that can take advantage of “catch up contributions”, they can bump it up to $666 each month.
*Important note*… No matter when or how often you transfer money to your account, you need to log in and actually invest that money into index funds on a regular basis. That’s the next step!
Step 6: Buy Index Funds
One of the most common financial mistakes people make when investing for their retirement… is forgetting to invest that money! When you make a transfer to your Roth IRA, that cash just sits there in your account until you go and actually invest it in something.
What do you invest in? Well If the idea of picking out stocks seems daunting to you, I have some good news. You don’t need a fancy investing strategy. Going the tried and true, kinda boring method of buying low cost index funds will get you where you need to be.
Essentially, when you put your money into index funds, you’re investing in a multitude of companies. This helps you diversify far and wide, decreasing your risk. Better yet, because index funds aren’t actively managed, they come with extremely low management fees. For the vast majority of folks, there’s no need to hire a financial advisor or pay ongoing hefty fees.
Sometimes simple is better. In fact, going in and picking your own stocks will often pale in comparison to the gains you could earn over time by just sticking with something as simple as an S&P 500 index fund. In fact, in a study of 2,132 actively managed funds (aka- stock pickers that trade for a living), not a single one was able to outperform the S&P 500.
Not sure of which index funds to buy? You can’t go wrong with any of the low-cost funds on this cheat sheet!
Bonus- If you’re completely new to investing, take some time to read through this beginner’s guide.
Step 7: Make Sure to Set up Dividend Reinvestment (DRIP)
Many index funds and ETFs pay out dividends. This is usually a small amount of cash from company profits that is distributed 4 times each year.
When dividends are reinvested, your account can take full advantage of compounding over time. If you don’t opt to reinvest dividends, cash will start to build up in your Roth IRA and will slowly work against you.
Strangely, many brokers make automatic dividend reinvestment (also sometimes called DRIP) a manual setting that you need to switch on. So don’t forget this very important step.
Failing to turn this setting on can mean the difference of hundreds of thousands of dollars when you reach retirement age, so make sure to take the time now to turn this setting on. Here are the guides to set up DRIP in Vanguard, Fidelity and Schwab.
Step 8: Set It And Forget It
This final step is both the easiest and hardest thing to do. It’s easy because you don’t need to do anything! But it’s hard because waiting and being patient is a skill most humans aren’t terribly skilled at 😅.
When it comes to your investing strategy, it’s important to think long term. You’ll see the biggest gains in your account when you leave your investments alone for ten, twenty, or thirty years without touching them. Or heck, maybe even longer!
You definitely don’t need to check your investments every day, or even every month. In fact, that might only make you more antsy in your pantsy.
Historically, the overall stock market has returned an average of 9.9% each year over the past 30 years. The longer you hold on to your investments, the less likely you are to lose money. While it may be easier said than done, don’t feel the need to over-manage your investments.
FAQ for Opening a Roth IRA:
If we didn’t cover it in the above, you might find the answer below. Or, feel free to reach out to us directly – or ask the HTM hive mind on facebook – if you have any specific questions.
Who are the best brokers for a Roth IRA?
There are plenty of good ones, both old school and new fin techs that offer Roth IRA accounts. But it’s important to ensure that you opt for a broker with no account fees, no trading fees, and low fund management fees. Our personal faves are Vanguard, Fidelity, and Schwab.
How much money do you need to open a Roth IRA?
Technically, none! – because many brokers don’t have an account minimum for opening a Roth IRA. However, you won’t start earning money for your retirement and experiencing the incredible financial benefits until you actually start contributing money into it. So, even if you only have an extra $10 laying around, it’s worth it to put that into your Roth IRA. Small amounts really do add up over time.
What is better, a Roth IRA or 401k?
Is it a cop out if we say both are the best?
Roth IRAs and 401ks each have their own unique benefits.
A 401k is an employer sponsored retirement account that allows you to contribute “pre tax dollars,” meaning it can help you lower your taxable income for the year. Then, when you withdraw those contributions, your money will be taxed at a normal rate.
Roth IRA’s do the opposite. Your contributions have no tax advantage upfront, but when you withdraw those funds in retirement, it’s all tax free.
Here are some other differences:
| Feature | Roth IRA | 401(k) |
| Contributions | You pay with after-tax dollars | Come out of your paycheck |
| Tax Benefits: | Tax-free growth and withdrawals in retirement. | Tax deduction now, but you’ll pay taxes on anything withdrawn later in retirement. |
| Contribution Limits | $7,000 for 2024 ($8,000 if you’re 50 or older) | $23,000 for 2024 ($30,500 if you’re 50 or older) |
| Employer Matching | Nope! | Yep if your company offers it. |
| Investment Options | Can invest in almost anything. | Funds are determined by your employer. You usually have very limited choices. |
| Early Withdrawals | Any money you contribute you can withdraw any time, without penalty. But taking out growth or earnings before retirement age will result in a penalty and taxes. | Any withdrawal from your 401(k) before retirement age comes with taxes and a 10% penalty. |
| Required Minimum Distributions (RMDs) | There are no RMDs for Roth IRAs. This means you can leave the money in your account and continue to grow it tax-free for as long as you want. | You must start taking RMDs from your 401(k) at age 72. If you don’t, you will owe a tax penalty of 50% of the amount you should have withdrawn. |
As you can see, there are too many factors to blatantly say that one account is better than the other.
In a perfect world, we’d encourage you to max out both accounts. But, we know that’s not a reality for a lot of folks. If you have a 401k match option from your employer, we definitely suggest prioritizing that – it’s free money! Always contribute enough until you’ve reached your maximum for the match.
If you don’t have a 401k, prioritizing your Roth IRA is a good place to start.
How quickly does a Roth IRA grow?
That all depends on which investments you choose, and how much money you contribute to it. When you’re just starting out, contributions matter way more than returns. Our suggestion is don’t focus on getting rich overnight. Slow and steady contributions should be your goal.
If you’re investing in a total stock market index fund, you can expect anywhere from a 7 – 10% return on average each year. Remember that the longer you keep your money invested, the higher chance you have of making money in the market.
How can I become a Roth IRA millionaire?
The process of becoming a Roth IRA millionaire is quite simple, although it does take time. If you were to max out your Roth IRA each year ($7k max contributions) with highly diversified index funds, you could see your account hit a million dollars in around 33 years time. Even if you have a small income, building significant wealth is very possible!
The Bottom Line:
The process of opening up a Roth IRA is simple. And taking the time to do it now rather than later can have a massive impact on your wealth building journey. Just be sure to not skip any steps, making sure all your funds are invested and dividends are continually reinvested.
For even more efficient growth in your account, choose a broker that charges no fees and offers low cost index funds. Fidelity, Vanguard and Schwab are all awesome options.
So what are you waiting for? Open up that Roth IRA and start investing!
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