Steps to get started with a Roth IRA

Pamela Rivers |

Roth IRAs are can be an excellent retirement savings vehicle and a good place to start if you are looking for a way to save for your retirement outside of an employer plan. Some decisions need to be made before you fund your account.

1. Is a Traditional IRA or a Roth IRA the best option for you?

Traditional IRA

Roth IRA

Contributions may be deductible from your annual income, which helps to reduce your current year taxes.

Contributions are made with after-tax money.

All withdrawals are taxed as ordinary income.

Withdrawal of earnings at 59 1/2 or later AND after your Roth has been open for the 5-year period are tax-free.

Individuals may contribute as long as they have earned income, although not all contributions may be deductible depending on income.

Roth IRAs have income limits. See here.

Required distributions begin at 72 years of age.

Roth IRAs do not have required distributions.

It is likely that we don’t yet know what your income will be in retirement nor do we know what the tax rates will be during your retirement years; therefore, we don’t have all of the information we need to make a perfect decision.

If you are in a high tax bracket now, a Traditional IRA should certainly be considered. If you anticipate higher tax rates in the future, it would be wise to consider a Roth IRA. Keep in mind many people save in both types of accounts. A financial advisor or accountant can provide guidance on this decision.


2. How much will you contribute and how often?

Generally, individuals under 50 years old, can contribute up to $6,000 and individuals over 50 years old can contribute up to $7,000 in an IRA per year for 2020 and 2021. You’ll also want to review the IRS income limits for a Roth IRA and for deductibility for a Traditional IRA. You may also be able to fund an IRA if your spouse is employed and you are not. Regardless, it is a good idea to talk with a financial advisor or accountant to review your household situation.

Once you have determined the maximum amount the IRS will allow you to contribute in a given year, you need to decide how much you can afford to contribute.

TIP: Just as you would pay your Netflix subscription, we often recommend making contributions automatic from your checking or savings accounts.


3. Where should you go to open your retirement account?

It might be helpful to think of a Traditional IRA or Roth IRA like a folder with nothing in it. You have options about what to put in your “folder”.

If you open the IRA at a bank or credit union it will be in a savings account or CD. If you open it with an investment company, you can use mutual funds, exchange-traded funds or other investment or insurance vehicles within the IRA.

This decision should be made by taking your time frame and risk tolerance into consideration. Keeping in mind that the risk and rate of return may significantly vary between funding an IRA in a savings account versus funding an IRA in an investment account over the long-term.

Wherever you decide to open your account, you’ll want to inquire account minimums and opening & ongoing fees. In order to open the account, be prepared to share the following:

  • Social security number
  • Driver’s license information
  • Bank account number
  • Routing number
  • Employer information
  • Beneficiary details

TIP: Now is a great time to get started because you can make your prior year contributions up until April 15th of the current year.