Roth IRAs are one of the best ways to save for retirement. While there’s no upfront tax benefit, you get tax-free income in retirement—even on your earnings. There are also no required minimum distributions for Roth IRAs during your lifetime. That means you can let the money keep growing if you don’t need it, then leave tax-free income to your beneficiaries. This structure is especially beneficial for younger people, who have decades for their money to compound before retirement.

Key Takeaways

  • Most people can open a Roth IRA easily with the help of a bank, brokerage firm, mutual fund company, or financial advisor.
  • There are just a handful of steps in the process, starting with making sure you are eligible.
  • Once you've opened your account, maintaining it requires very little effort.

Anyone with earned income can contribute to a Roth IRA, regardless of age, so you can keep adding to your account as long as you wish. (With a traditional IRA, you can no longer contribute starting the year you become 70½.) One more perk: It’s really easy to open a Roth IRA, especially online. Here’s how.

1. Make Sure You’re Eligible for a Roth IRA

Most people are eligible to start a Roth IRA, provided they have earned income for the year. But there are income limits, based on your adjusted gross income (AGI). Currently, if you make $203,000 or more a year, and you file jointly, or $137,000, and you file as a single person, you may not be eligible. The income limits typically change every year, so check if you're close to one of the limits to see where you fall.

For 2019, you can contribute a combined $6,000 to all of your IRAs ($7,000 if you’re 50 or older). The contribution limits for IRAs change periodically—for example, the limit was $5,500 from 2015 through 2018. Here are the limits for 2019:

Roth IRA Income Limits, 2019
If your filing status is... And your modified AGI is... You can contribute
Married filing jointly <$193,000 Up to the limit
  > $193,000 but
< $203,000
A reduced amount
   $203,000 Zero
Married filing separately, but you live with your spouse <$10,000 A reduced amount
  $10,000 Zero
Single, head of household or married filing separately and you did not live with your spouse <$122,000 Up to the limit
  > $122,000 but
< $137,000
A reduced amount
  $137,000 Zero

If you need to reduce your contribution because you make between $193,000 and $203,000 for joint filers, or between $122,000 and $137,000 for single filers, you can use our Roth IRA calculator.

The figures for 2020 are:

Roth IRA Income Limits, 2020
If your filing status is... And your modified AGI is... You can contribute
Married filing jointly <$196,000 Up to the limit
  > $196,000 but
< $206,000
A reduced amount
   $206,000 Zero
Married filing separately, but you live with your spouse <$10,000 A reduced amount
  $10,000 Zero
Single, head of household or married filing separately and you did not live with your spouse <$124,000 Up to the limit
  > $124,000 but
< $139,000
A reduced amount
  $139,000 Zero

If you make too much to contribute directly to a Roth IRA, a so-called "backdoor" Roth IRA conversion might be an option for you.

2. Decide Where to Open Your Roth IRA Account

Almost all investment companies offer Roth IRA accounts. If you have an existing traditional IRA somewhere, the same company can probably open a Roth IRA for you.

Ask these questions as you decide where to open the account:

  • Is there a fee to open or maintain it?
  • Does it provide the kind of customer service you want, whether online or by telephone?
  • Does the company offer the types of investments you're looking for, whether that means ETFs, target-date funds, actively managed funds, or stocks and bonds?
  • How much does it cost to trade? This is especially important if you plan to buy and sell frequently in your account.

There are many online brokerages offering Roth IRA accounts and some are better than others. We put together a list of the best brokers for Roth IRAs to make the process easier.

The financial institution you open the account with is called the “custodian” because it takes custody of your money.

3. Fill Out the Paperwork

Most banks and brokerages have a web page for Roth IRAs that you can visit to begin the process. You may be able to complete the entire application online, or you can speak to someone in customer service if you have questions.

You’ll need the following:

  • A driver’s license or another form of photo identification.
  • Your Social Security number.
  • Your bank’s routing number and your checking or savings account number so that you can transfer money directly to your new account.
  • The name and address of your employer.
  • The name, address, and Social Security number of your plan beneficiary (the person who will get the money in the account if you die).

Naming one or more beneficiaries is very important. It allows the account to pass to someone else without having to go through probate. Remember to keep your beneficiary designation up to date, especially after events like marriage, divorce, or the death of a beneficiary.

As part of the application process, you will have to fill out a 5305-R form for the Internal Revenue Service (IRS).

4. Make Your Investment Choices

The financial firm will help you open the account, but you’ll need to decide how you want to invest the money that goes into your Roth. This can be the most difficult part of starting a Roth.

There are three basic approaches to choosing investments for your Roth IRA.

  • Design your own portfolio by picking a selection from the numerous options available at most financial institutions.
  • Buy a target-date or life-cycle fund. It’s like an off-the-shelf portfolio designed by an investment company for someone of your age.
  • Consult a financial advisor, either one who works with that financial institution, or your own independent advisor.

Some considerations about each of these choices:

Design your own portfolio

If you’re going to design your own investment portfolio within your Roth IRA, it’s important to pick investments based on your comfort level and your time horizon to retirement. Many people put more of their investments into bonds as they get older because bonds are traditionally more stable than stocks. On the other hand, stocks historically have produced higher returns, so there’s a trade-off.

New rules of thumb suggest keeping a sizable portion of stocks in your portfolio even as you get older. That’s because people are living longer, often have lower retirement savings, and may face increased medical expenses.

Many experts recommend buying two to six different mutual funds or exchange-traded funds (ETFs)—some made up of stocks and others of bonds—and keeping a small percentage 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%. That fee is in addition to the fees you may pay the bank or brokerage for the account itself.

Buy a target-date or life-cycle fund

These funds, which consist of a mix of stocks and bonds, are designed to automatically adjust over time. The idea is that you need to have less risk of a large drop in value as you get close to retiring. Some examples from well-known fund families are Fidelity’s Freedom Funds and Vanguard’s Target Retirement Funds. If you buy a target-date fund, remember that it’s designed to be your entire retirement portfolio. It’s best to buy just one. Also note that because of the management involved in these funds, their fees can be higher than other investments.

Consult an advisor

Some people prefer to hire an advisor, such as a fee-only financial planner, to help them pick investments for their Roth IRA accounts. Others rely on free or paid guidance from the company that is the custodian of their account. Either way, be sure to ask questions so that you know what you're getting and whether it's appropriate for your goals.

5. Set Up Your Contribution Schedule

If your bank allows you to, you can set up monthly transfers from your bank account to your Roth IRA. Alternatively, you can decide to make an annual contribution, as long as you still meet the income requirements. You can contribute to your Roth IRA as late as the tax-filing date in the following year, typically April 15.

Remember, contributions to Roth IRAs are made with after-tax money, so there’s no tax advantage to waiting until the last minute to make your contribution. In fact, the sooner you contribute, the sooner it will go to work for you.

Check your Roth IRA account at least once a year to see if it needs rebalancing.

After You've Opened Your Roth IRA Account

Be sure to read your regular account statements and take time to carefully reevaluate your investment choices at least once a year. You may want to buy and sell investments at that point to rebalance your account.

Over time, as markets rise and fall, the value of your investments will change. For example, let’s say you started the year with a portfolio that was 30% in bond funds and 70% in stock funds. You may find that at the end of a year, the portfolio has shifted. If stocks have declined in value, it now may be 40% bonds and 60% stocks.

In that case, you might want to sell some shares of the bond funds and use the proceeds to buy more shares in the stock funds. The more investments you own, the more complicated rebalancing will be. This typically becomes more important the closer you are to retirement, when you may rebalance to increase the percentage of less-volatile fixed-income assets such as bonds.

If you have a target-date fund, you don’t need to worry about rebalancing, but it’s still smart to check on your account.

If you hired a financial advisor, they can provide guidance on rebalancing.

Many financial experts say everyone should have a Roth IRA if they’re eligible. It’s never too early (or, unlike traditional IRAs, too late) to open a Roth IRA—and it’s easy to get started.