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Starting a Roth IRA Is Easier Than It Seems

Quick Summary

  • Make sure you are eligible to start a Roth IRA. Your income and tax-filing status will determine how much you can contribute.
  • Pick where you want to start your Roth IRA. Companies from full-service financial advisors to discount brokerages offer Roth IRA accounts
  • Choose your investments. You can pick almost any investment for your Roth IRA.

Introduction

Starting a Roth IRA isn’t nearly as hard as it seems. Opening a Roth IRA can be one of the best retirement-planning decisions you make because your money grows tax-free and you can withdraw it tax-free when you retire. Some of the most common questions about opening a Roth IRA are:

Are you eligible for a Roth IRA?

Most people are eligible to start a Roth IRA. But your eligibility for a Roth IRA may be limited by your income. If you earn too much, you may not be able to contribute. The chart below shows the limits for 2017.

For 2017, you can contribute $5,500, in total, to all your IRAs. You can contribute $6,500 if you are 50 or older. The contribution limits for IRAs typically change every year.

If your filing status isAnd your modified AGI is …Then you can contribute ...
Married filing jointly< $186,000up to the limit
>$186,000 but <$196,000a reduced amount
> $196,000zero
Married filing separately, but you live with your spouse<$10,000a reduced amount
>$10,000zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year

 

<$118,000up to the limit
>$118,000 but <$133,000a reduced amount
>  $133,000zero

If you must reduce your contribution based on the chart above,  you can find the formula for figuring how much you can contribute here, on the IRS website.

If you make too much to contribute directly to a Roth IRA, you may be able to do a “backdoor” Roth IRA conversion.

Where should you start a Roth IRA?

Almost all investment companies, from banks to financial advisors, offer Roth IRA accounts. If you have an existing Traditional IRA somewhere, the same company can probably open a Roth IRA for you.

Most experts suggest asking these questions when you consider where to open your account:

  • Is there a fee to open or maintain the account?
  • What kind of customer service does it offer, whether it is online or by telephone?
  • Does the company offer the kinds of investments you want, from ETFs to target-date funds to actively managed funds?
  • How much does it cost to make a trade (especially if you plan to buy and sell frequently in your account)?

Some companies that offer Roth IRA accounts are:

  • Fidelity: Fidelity’s Roth IRA accounts are free and the company offers one of the widest selections of investment options, including target-date funds.
  • E*Trade: E*Trade, a discount online brokerage, offers very low trading fees and access to many different investment products.
  • Merrill Edge: Merrill Edge offers a connection with a bank—Bank of America—which can make regular automatic transfers into your Roth IRA easy. It also has low-cost trades and the ability to work with financial advisors.

How do you choose your investments?

There are three different ways to approach buying investments in your Roth IRA. You can design your own portfolio by picking a selection from thousands of options available at most banks and brokerages. You can buy a target-date or lifecycle fund. You can also consult a financial advisor, one who works with your bank or brokerage, or an independent advisor.

If you are going to design your own investment portfolio within your Roth IRA, the most important idea is to pick your investments based on your comfort level. The biggest mistake investors make is buying and selling too frequently, especially because they are reacting to the market.

Most experts recommend buying two to six different mutual funds or exchange-traded funds, some that focus on stocks and some that have bonds. You should also keep a small portion of your account in cash or cash equivalents, such as money-market funds. Look for funds that have expense ratios of less than 0.5%. Remember: That  fee is in addition to the fee you may pay to the bank or brokerage for the account itself.

Another good option is target-date funds or lifecycle funds. These are designed to automatically diversify your investments and adjust over time, so that you have less risk of a large drop in value as you near retirement. Some examples of good fund families are Fidelity’s Freedom Funds or Vanguard’s Target Date Funds. If you buy a target date fund, remember it is designed to take the place of your entire retirement account. It’s best to buy just one.

Some people hire investment advisors to help them pick investments in their Roth IRA accounts. Others rely on guidance from the company that is providing them the account.

What is the deadline for opening a Roth IRA?

The deadline for opening a Roth IRA account and making contributions is generally April 15 of the following tax year. This date is sometimes later, due to weekends or holidays. For instance, the deadline to make contributions for the 2017 tax year is April 18, 2018.

Compare Popular IRA Providers

Provider
Fidelity Investments
Merrill Edge
E*Trade
NameFidelity Roth IRAMerrill Edge IRAE*Trade IRA
DescriptionGet a range of investment choices, tax advantages and 1:1 help with a Fidelity Roth IRA Learn MoreGet up to $600 when you invest in a new Merrill Edge IRA. Plus one-on-one guidance, actionable insights and easy-to-use tools. Learn MoreTrade and Invest for Your Retirement All in One Place with E*TRADE. Learn More

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