There are various options for investing for retirement, but one savings account stands out as an easy-to-set-up and simple-to-maintain plan. A Roth IRA retirement account has tax advantages that allow you to save and grow your capital for the long term. Please read our ‘how to open a Roth IRA’ guide for all you need to know to increase your wealth.
How to Open a Roth IRA: Guide
What is a Roth IRA?
A Roth IRA (Individual Retirement Account) is a savings account specifically for saving and growing funds that can be used in retirement. Like a traditional IRA, you can build savings by making regular payments and investing them in a portfolio of bonds, stocks, and other investments.
It allows the owner to pay taxes on the invested money upfront. This means that any withdrawals made after the age of 59 ½ are tax-exempt, assuming the account has been held for five years or more.
Contributions to a traditional IRA are tax-deferred, meaning that the investor is taxed when withdrawing the income.
What are the Benefits of a Roth IRA?
Because the money in a Roth IRA grows tax-free, or with after-tax dollars, the tax is already paid, and the money in the account can do its thing and start to grow.
Paying more taxes while saving means that the investor saves on tax payments down the line as the investments mature.
On withdrawal, the investor won’t owe any taxes, making the retirement money go much further. If in time, it equates to hundreds of thousands of dollars, the entire funds are tax-free, which is particularly useful for those expecting to be in a higher tax bracket after retirement.
The Roth IRA allows investors to withdraw at any age (unlike the traditional IRA, which forces investors to begin withdrawals from age 72).
Savers can keep contributing to a Roth IRA even if they pass retirement age assuming their income falls within income limits.
Furthermore, investors can elect beneficiaries to inherit the account who will also be able to withdraw tax-exempt.
There are ceiling contribution limits for payments into a Roth IRA. For 2020, you can only contribute $6000 or $7000 for those aged 50 or older.
Anyone who earns income is eligible for a Roth IRA. However, it is not available for anybody with high incomes. For 2020 the income limits are $124,000 for single filers and $196,000 for married couples filing jointly.
If your modified adjusted gross income (MAGI) is between $124,000 and $139,000, you can still contribute, but it must be reduced. Anyone earning over $139,000 as a single filer, isn’t eligible to contribute to a Roth IRA.
Joint filers earning between $196,000 and $206,000 qualify to make reduced contributions. Those with an adjusted gross income of over $206,000 are not eligible.
You can set up a Roth IRA for your spouse if they don’t work if you file a joint income tax return and have a taxable income.
How to Open a Roth IRA
In most cases, a Roth IRA account can be started with as little as $50, which is great news for everyone. Although the IRS doesn’t require a minimum amount, most mutual fund companies do.
A Roth IRA account is opened and maintained by the individual investor and separate to any employment-sponsored retirement savings plans.
Before you start saving, ensure unsecured debts are paid, and an emergency fund is protected but accessible.
Research the best companies to open an account with, and who best suit your needs. Seek advice from a financial adviser to make the process easier and securely.
When you’re ready to open your Roth IRA, get your documents together. You will need:
- Passport/ driver’s license or another form of acceptable photo I.D
- Social Security number
- Bank routing number
- Checking or savings account number
- Employer’s name and address
- Name, Social Security number, and date of birth of your chosen beneficiary
Once opened, you can then make an initial deposit and/or set up a standing order (up to the limits).
Your advisor will explain the different funds you can invest in, and you’ll have to work out your risk profile to make a choice on how to spread your investments.
Regularly check your investments and use investing calculators to verify you’re on track for a financially healthy retirement.
Ideally, stick with your fund for the long term. Your Roth IRA will rise and fall with the market but should grow over the lifetime. Contributions of $6,000 per year over 30 years can grow to $1.4 million. This does depend on payments, term, how long until retirement, and expected annual income.
Risks Associated with a Roth IRA
There’s an element of risk with any investment, but by spreading the investment across four funds, the risk can be minimized.
- Growth and income
- Aggressive growth
A diverse portfolio will balance between steady investments and high-risk investments, thus will ride out any dips in the market.
Access to Your Roth IRA Before Retirement
If you decide that you need to access your Roth IRA before the age of 59 ½, this can be done but with tax implications and penalties on withdrawal.
Never make a financial decision during a panic and withdraw all your money out of your Roth IRA, at least without consulting with a professional.
Have you found our ‘How to Open a Roth IRA’ Guide useful? Do you have a Roth IRA yet? Do you think it’s a great way to invest for retirement? Let us know in the comments section below.