Roth IRAs might just be the rock stars of the investment world. By offering tax-free money in retirement—and a broad range of investment options—Roth IRAs also come with some nice perks that other retirement vehicles don't have.

And yet, it’s hard not to get overwhelmed by the sheer number of options in the IRA marketplace. Lots of financial institutions offer these accounts, all with slightly different features and pricing.

But worry no more. If you’re thinking about jump-starting your retirement savings with a Roth IRA, here’s what you need to know.

Key Takeaways

  • A Roth IRA has a number of benefits, but you first need to decide whether it is the right retirement savings option for your situation.
  • If your income is too high, contributing to a Roth may not be an option. For 2021, the phase-out range for single filers is $125,000 to $140,000; for married couples filing jointly, it's $198,000 to $208,000.
  • You'll need to decide whether to open an account with a robo-advisor, a bank, an online brokerage firm, or a mutual fund company.
  • Many providers let you open an account online, so be sure you have the information you need and have chosen your beneficiary.
  • The IRS allows a fairly broad range of investment vehicles in Roth IRAs, including stocks, bonds, mutual funds, ETFs, certificates of deposit, and even real estate investment trusts (REITs).

Decide If a Roth IRA Is Right for You

The first thing you need to do is figure out if a Roth account is the best savings option for your needs. Before heading down the IRA path, make sure you’ve maxed out your employer’s contribution to your 401(k) or other workplace retirement plan—that is, if you’re lucky enough to get one in your compensation package. If you’re not kicking in enough to hit the limit of your employer match, you’re essentially leaving free money on the table. (Typically, 50 cents for every dollar you contribute up to a certain percentage of your pay.)

Once you’ve crossed that threshold with your workplace account, individual retirement accounts (IRAs) are often the next best place to park your money (yes, you can contribute to both a 401(k)-style plan and an IRA, as long as you stay within the contribution limits for each savings vehicle). The tax benefits are similar to workplace plans but offer a lot more choices. Instead of being limited to a menu offered by your employer, you can choose any number of individual stocks, bonds, mutual funds, CDs, and even real estate investment trusts (REITs).

Traditional IRAs offer tax-deductible contributions but subject you to income taxes when you eventually pull out the money. The Roth version works just the opposite. You invest after-tax money, but you don’t pay any tax on withdrawals, including the earnings, if you’re past age 59½ and have had a Roth account for at least five years.

Roth IRAs are a good option for those who expect to be in a higher tax bracket by the time they hit retirement, as is frequently the case with younger workers. What’s more, unlike a traditional IRA, there are no required minimum distributions (RMDs) once you hit age 72, so you get a little more flexibility to boot. The RMD used to be 70½, but following the passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in December 2019, it was raised to 72.

Check Your Eligibility

A Roth IRA may not be an option if you exceed income restrictions. For 2021, eligibility starts to phase out for those filing as single or head of household who make more than $125,000. Once you hit $140,000 in earnings, you’re no longer able to contribute.

For joint filers for 2021, the cut-off is $208,000, with a phase-out above $198,000. Keep in mind that the deadline for contributing to a Roth IRA is the tax deadline for filing for that year.

Decide Where to Open Your Account

If you’re not altogether confident when making big money decisions, you can always hire a financial advisor to help manage your assets for you. One advantage is that they can help you adjust your plan based on updates to the tax code—not to mention changes in what investment options are available through your IRA provider.

These days, financial planners aren’t the only place you can get help with your Roth account. A number of algorithm-based online robo-advisors have cropped up in recent years to select investments for you, including Betterment and Wealthfront. These companies use your personal information and goals to build an appropriate asset mix and periodically rebalance your investments.

With management fees of 0.25% to 0.50% a year, robo-advisors tend to be cheaper than a human planner. That said, they’re also not designed to handle the full array of financial needs that a professional can.

Other Options

For those who are perfectly happy managing an IRA on their own—and saving a few bucks in the process—there are other options. You can go with a broker like Merrill Edge (part of Bank of America) or TD Ameritrade, which both offer free stock trades. (Neither broker has account minimums.)

Another option for do-it-yourselfers: going straight to mutual fund companies such as Vanguard and Fidelity. These tend to be a better choice for people who like the diversification that funds offer and gravitate toward certain investment companies anyway.

Many IRA providers are offering a tiered approach to appeal to a broader segment of the market, with a low-cost “do it yourself” option, as well as accounts that provide professional oversight, for a fee.

It’s worth doing a little research to see what best suits your specific needs.

The chart below will give you a sense of which type of custodian might be the best fit for your needs. Before selecting one, you'll have to decide whether you want to choose the underlying securities yourself or pay a little extra to have them managed for you.

Choosing an IRA Custodian
  Pros Cons
Robo-Advisors Good for those who don't feel comfortable managing their own investments They assess annual maintenance fees that some places don't
Online Brokerage Firms Lots of investment options. Well-suited for DIY investors. Generally charge a modest fee for trades
Banks Ability to have all your financial accounts under one roof. IRA CDs are federally insured If CDs are the only option they offer, you can expect lower rates of return over time
Mutual Fund Companies You can often avoid sales "loads" when buying funds You're limited to their products

Complete the Documentation

Actually opening up an account is fairly straightforward, and the vast majority of providers allow you to do it online. Of course, you’ll need to provide some information to verify who you are.

Here’s what you should have handy in order to speed up the process:

  • Your Social Security number
  • A driver’s license or other photo ID
  • The name and address of your employer
  • Your bank account number and routing number, in order to transfer cash into the IRA
  • If completing a rollover, account information for your existing IRA or 401(k)
  • The name and Social Security number of the beneficiary of your account

You’ll want to give some thought to your choice of beneficiary. When you eventually pass on, don’t assume the instructions in your will supersede the beneficiary information you provide the financial institution. In fact, it generally works the other way around.

Choose Your Investments

Unless you opt for a robo-advisor or other asset-management service, you’ll have to select the individual investments that will go into your Roth account. The IRS allows a fairly broad range of vehicles, including stocks, bonds, mutual funds, ETFs, and certificates of deposit.

You can also opt for target-date funds that offer a pre-set mix of individual stock and bond funds based on your investment horizon. As you get closer to your retirement date, you can expect the asset mix to become more conservative.

In addition to your initial purchase—and some accounts do require a minimum balance to get started—many investors choose to set up recurring contributions, which enable their account to grow over time.

Just make sure you don’t kick in too much. For 2020 and 2021, you’re only allowed to invest $6,000 a year across all of your IRA accounts—$7,000 if you’re age 50 or older. So if you put $2,000 toward a separate, traditional IRA, younger investors can only contribute $4,000 to their Roth.

Put in more than that, and you’ll find yourself on the hook for a 6% tax on the excess contributions that remain in your account. Needless to say, it’s worth doing some simple math to make sure your automated contributions don’t put you over the limit.

When you are building your Roth IRA portfolio, consider target-date funds, which offer a pre-set mix of individual stock and bond funds based on your investment horizon.

The Bottom Line

Choice is a nice luxury to have, but it does require more homework when it comes to choosing a Roth IRA provider. Figure out which plan features mean the most to you, and which ones you can forgo. Then, opening an account is the easiest part.