A Roth IRA is a terrific way to save for retirement. While you don’t get an upfront tax break, your contributions and earnings grow tax-free. And when you later take qualified distributions, they’re tax-free, too. If you expect to be in a higher tax bracket in retirement than you are now, that can be a smart tax strategy.

Key Takeaways

  • If you're eligible for a Roth IRA, you can contribute up to $6,000 a year (as of 2019). If you’re 50 or older, you can make an additional $1,000 catch-up contribution.
  • You can open a Roth IRA at many financial institutions and arrange to fund it automatically.
  • You can also fund a Roth IRA by moving money into it from another retirement account.

Opening and Funding Your Roth IRA

Before you can fund a Roth IRA, you have to open an account. Nearly all financial institutions—including banks, mutual fund companies, and brokerage firms—offer Roth IRA accounts. For convenience sake, you might want to open your account at a financial institution you already do business with.

Before you apply, make sure you’re eligible for a Roth IRA, according to the income limits mentioned above. You also need to have earned income that matches or exceeds your Roth IRA contribution for the year.

In most cases, you can take care of the application online. You’ll need the following:

  • A driver’s license (or some other photo ID)
  • Your Social Security number
  • Your banking details, including the routing number and account number
  • Your employer’s name and address
  • Details on your beneficiaries

Once your application is approved, you can make your first contribution with cash, a check, or a bank transfer. To simplify matters, you can also arrange for future contributions to come regularly and automatically out of your checking account or other source.

Fund It With a Roth IRA Conversion

Another way to fund your Roth IRA is to transfer money from an existing retirement account. This is known as a Roth IRA conversion. You can move money into your Roth IRA from these sources:

  • Traditional IRAs
  • Employer-sponsored 401(k) or 403(b) plans
  • Government 457(b) plans
  • SEP-IRAs

Keep in mind that a Roth conversion is a taxable event. When you move money from a pre-tax retirement account (such as a traditional IRA) to a Roth, you’ll owe income taxes on that money. In general, it’s a good idea to save a conversion for a year when:

  • You earn too much to contribute to a Roth directly, and you expect to be in a higher tax bracket later.
  • It won’t bump you up into a higher tax bracket.
  • The account you’re moving has suffered losses (a lower balance means you’ll owe less tax at conversion time).
  • Your income is lower than usual (for example, you were unemployed for part of the year or took a medical leave).

If you plan to fund your account through a Roth IRA conversion, remember that you'll have to pay income taxes on that money.

Set It and Forget It

You have until the tax year’s filing deadline to contribute to your Roth IRA. For 2019, that’s April 15, 2020. But you don’t have to wait until then. You can add money to your account as early as Jan. 1 of the current tax year. Funding your account as early a possible means your money will have that much longer to grow, tax-free.

You can make one large contribution—at any point between Jan. 1 and mid-April of the following year—if you have the cash on hand to do so. For many people, however, it’s easier to make several smaller contributions throughout the year.

If you do that, it’s wise to set up a Roth IRA contribution schedule. Decide if you want to contribute weekly, monthly, quarterly—whatever works best for you—and mark those dates on your calendar or set reminders on your phone or computer.

Of course, that can be a lot to keep track of. Fortunately, as mentioned earlier, you can arrange for automatic transfers from your bank so you don’t forget to invest. Check your Roth IRA provider's website for how to go about it.

But no matter how you fund your Roth IRA, try to make it a habit, and start as early as possible. If you open a Roth IRA when you’re 20, for example, contribute $6,000 a year until age 65, and your account earns an average of 8% a year, you’ll have more than $2.5 million heading into retirement. And it will all be tax-free.

Roth IRA Advantages

Roth IRAs have other perks, as well. Unlike traditional IRAs, you don't have to take any required minimum distributions during your lifetime. So if you don’t need the money for living expenses, you can just leave it in the account to grow. You can then pass your entire Roth IRA to your beneficiaries, providing them with years of tax-free growth and income.

There’s also no age limit for making contributions, as there is with traditional IRAs. As long as you have earned income, you can keep adding to the account, even if you’re 100 years old. You can't fund it with investment income.

The contribution limits change periodically. For 2019, you can contribute up to $6,000 to a Roth IRA—or $7,000 if you’re age 50 or older—provided you meet the IRS income limits.