You’re ready to start investing, and that’s great. If you’ve chosen a Roth individual retirement account (Roth IRA) as one of your investment tools, you’re in luck. Most banks and financial institutions offer Roth IRA options, and you can set one up quite easily.
How a Roth IRA Works
A Roth IRA is an individual investment account that allows investors to contribute after-tax money that will grow until retirement age. Since contributions are already taxed, your distributions after the age of 59½ will be tax free. Contributions can be withdrawn at any time, tax- and penalty-free, even years before retirement. Need some of the earnings, too? In certain situations, those withdrawals are also allowed.
Key Takeaways
- Make sure that you’re eligible to open a Roth individual retirement account (Roth IRA). You must earn income to open an IRA, or be married and file joint taxes to open a spousal Roth IRA.
- You’ll need basic documents to open an account, including a form of government-issued identification, your Social Security number, and account numbers for funding.
- Once your account is open, you must choose funds, stocks, or bonds.
Am I Qualified to Open a Roth IRA?
The first step to opening a Roth IRA is determining if you’re eligible. Roth IRAs are extremely flexible, with no age limits. The only stipulation is that they must be funded using earned income.
Earned income can mean wages earned from an hourly job, a salary, bonuses, self-employment income, or even some stock sales or scholarships. Children who earn money are also eligible for a Roth IRA as long as they earn real income, such as from a part-time job or an entrepreneurial endeavor. Money earned from chores or allowance do not count as earned income.
If you are married but unemployed, you may be eligible for a spousal IRA as long as your spouse’s income falls within Internal Revenue Service (IRS) income guidelines.
For 2022, the working spouse may earn up to $204,000 in modified adjusted gross income(MAGI) to qualify for the full contribution amount. For 2023, they may earn up to $218,000. Incomes past these limits may qualify for partial contributions until their income exceeds the maximum allowed for a Roth IRA.
To open a spousal Roth IRA, you must file your taxes as married filing jointly.
These Are the Documents That You Need
Once you’ve determined your eligibility status, opening a Roth IRA is relatively simple. Most banking or investing platforms require just a few key pieces of information to open an account:
- Driver’s license or some other form of government-issued photo identification
- Your Social Security number
- A way to fund the account, generally bank routing and account numbers
- Your employer’s name and address, if applicable
- Beneficiary information
If you’re transferring other assets or converting a traditional IRA into your new Roth IRA, then you may need the account numbers for those accounts as well.
What to Do After Opening Your Roth IRA
Once your account is open, you can transfer funds into the account from either your bank account or other investment vehicles. Make sure to choose funds to invest in—a Roth IRA is simply the investment account governed by the tax code. To grow your account, you must allocate the money in it into specific mutual funds, exchange-traded funds (ETFs), index funds, or individual stocks, bonds, or other assets.
Since Roth IRAs are funded with after-tax dollars, there’s no need to report your contributions when you file your taxes. You will receive a Form 5498 from your investment body at the end of the investing year. They file this form with the IRS, reporting how much you’ve contributed in that tax year. Keep your copy for your own records.
Can I have Both a Traditional Individual Retirement Account (IRA) and a Roth IRA?
Yes. You can have both types of individual retirement accounts (IRAs), and you can also have more than one Roth IRA. However, the yearly contribution limit remains the same. For 2022 and 2023, you may contribute up to $6,500 across all IRAs. People age 50 and older may invest an additional $1,000 each year as a catch-up contribution.
Can I Open a Roth IRA Without a Driver’s License?
Yes. You may use any form of government-issued identification, such as a non-driver’s ID, a green card, or United States-issued passport. Certain visa holders may also open a Roth IRA.
Can I Fund my Roth IRA Using Alimony or Child Support?
Unfortunately, child support and alimony are not taxed income sources, so they do not count as earned income. The exception comes from taxable alimony income that was decided on or before Dec. 31, 2018.
The Bottom Line
A Roth IRA is an easy way to save for retirement using after-tax dollars to invest. With basic identification, a Social Security card, and a funding source, you can open one online at most banks or investment companies such as Fidelity, Vanguard, or with other asset management companies. Since Roth IRAs are funded with after-tax dollars, there’s no additional reporting on your end for tax purposes.
FAQs
The great thing about Roth IRAs is that you don't need to invest a ton of money to open an account. In fact, the IRS doesn't require a minimum amount to open a Roth IRA. Most mutual fund companies require an account minimum to open one, but you can start a Roth IRA with as little as $50 in most cases.
What are the requirements to set up a Roth IRA? ›
Account opening and funding questions
- Social security number(s)
- Driver's license.
- Employer's name and address (if applicable)
- Statement information for any assets or cash you'd like to transfer.
- Beneficiary information.
- Who can contribute to an IRA? ...
- How much can I contribute to an IRA each year? ...
- What's the difference between pre-tax and after-tax IRA contributions? ...
- Are my contributions tax deductible? ...
- Can I contribute to an IRA that I inherited? ...
- Can I contribute to an IRA once I've retired?
You can open a Roth account online or in person at any number of places — mutual fund firms, discount brokerages, full-service brokerages, financial planning firms and robo-advisors, to name a few. The IRS stipulates that an account or annuity must be designated as a Roth IRA when it is opened.
How do I set up a Roth IRA for dummies? ›
Be sure to review the financial institution where you'll open your account as well as your investment choices.
- Make Sure You're Eligible.
- Decide Where to Open Your Roth IRA Account.
- Fill Out the Paperwork.
- Choose Investments.
- Set Up a Contribution Schedule.
- After You've Opened Your Account.
If you contribute 5,000 dollars per year to a Roth IRA and earn an average annual return of 10 percent, your account balance will be worth a figure in the region of 250,000 dollars after 20 years.
What is the requirement for Roth? ›
If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you're married and filing jointly, your MAGI must be under $228,000 for tax year 2023 and $240,000 for tax year 2024.
What is the 4 rule for Roth IRA? ›
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after.
Is there a downside to opening a Roth IRA? ›
There's a lot to like about Roth IRAs, including tax-free withdrawals in retirement. But the accounts do have some cons, such as no upfront tax break, and income limits for contributing. Tax Specialist | Personal finance reporter for 16+ years, including work for the Wall Street Journal and MarketWatch.
Does it matter which bank you open a Roth IRA with? ›
Not all financial institutions are created equal. Some IRA providers have an expansive list of investment options, while others are more restrictive. Almost every institution has a different fee structure for your Roth IRA, which can have a significant impact on your investment returns.
Investing in a Roth individual retirement account is one way to decrease your taxes. A Roth IRA is a tax-advantaged retirement account. Unlike a traditional IRA, where you don't pay taxes on the money contributed until you take a distribution, contributions to Roths are made with after-tax dollars.
What is the return rate on a Roth IRA? ›
What's the average Roth IRA interest rate? Roth IRAs aren't investments and don't pay interest or earn interest, but the investments held within Roth IRAs may earn a return over time. Depending on your investment choices, you may be able to earn an average annual return between 7% and 10%.
How much does it cost to open a Roth IRA? ›
Many robo-advisors and brokers have $0 minimums to open an account. The IRS allows you to contribute up to $7,000 in 2024 if you're under 50, or $8,000 if you're 50 or older. You're not required to contribute the maximum. You can add money to your Roth IRA at whatever cadence and amount works for your budget.
What documents do I need to open a Roth IRA? ›
You'll need basic documents to open an account, including a form of government-issued identification, your Social Security number, and account numbers for funding. Once your account is open, you must choose funds, stocks, or bonds.
Do I need income to open a Roth IRA? ›
Income: To contribute to a Roth IRA, you must have compensation (i.e. wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than: $160,000 - Married filing jointly.
How much money do you need to open a Roth IRA? ›
Many robo-advisors and brokers have $0 minimums to open an account. The IRS allows you to contribute up to $7,000 in 2024 if you're under 50, or $8,000 if you're 50 or older. You're not required to contribute the maximum. You can add money to your Roth IRA at whatever cadence and amount works for your budget.
Who is eligible to open Roth IRA? ›
There is no age requirement to open a Roth IRA. To contribute, you must have earned income in the year you wish to contribute. That means even people under 18 who've earned money—perhaps from a summer job or after-school gig—can start saving for retirement.
What determines eligibility for Roth IRA? ›
Income: To contribute to a Roth IRA, you must have compensation (i.e. wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than: $160,000 - Married filing jointly. $10,000 - Married filing separately (and you lived with your spouse at any time during the year).
Should I open a Roth IRA with my bank? ›
Bank Roth IRAs are insured by Federal Deposit Insurance Corporation (FDIC) for up to $250,000. Brokerages may offer a broader range of Roth IRA investment options than some banks. In most cases, buying a Roth IRA from a brokerage makes more sense when you're trying to fund a comfortable retirement.
