YOUR STEP BY STEP GUIDE TO OPENING A ROTH IRA
Here is your step by step guide to opening a Roth IRA (individual retirement account) & getting started investing!
STEP #1 Determine your eligibility
- must be 18 years of age
- must be earning income & paying taxes on that income in the given year
- your modified Adjusted Gross Income (MAGI) must not exceeding the following limits, dependent on how you are filing taxes:
- married filing jointly = $228k
- single, head of household, or married filed separately = $153k
- see the below for more detail published by the IRS. If you exceed these income limits you can still contribute to a Roth IRA with the Backdoor Method.
*consider consulting a professional and referencing Form 590-A on the IRS website for more info prior to opening your account*
STEP #2 Decide on a Brokerage Company to open your IRA with.
This is much like the decision you make regarding which bank to use to open a checking or savings accounts. All brokerages will have different account fees, investment fees, investment options, etc. So it is important to explore your options and choose one that is inline with what you are looking for. I personally use Vanguard and Fidelity for my investment accounts. Both are low fee, user friendly brokerages and I would highly recommend either of the two.
STEP #3 Google “Open Roth IRA with (brokerage company of your choice) and initiate opening the account
STEP #4 Decide on Self-Managed or Robo-Advisor
While going through the steps of opening the account you will likely be prompted with a question asking you to decide if you want to self-manage or use the brokerage’s robo-advisor tool.
I personally choose to self-manage my investments and it takes me less than an hour of management per YEAR. I am confident in doing that because I understand how to properly manage my investment portfolio by rebalancing my assets between stocks and bonds in order to manage my risk as I age. I am confident that you can understand how to do the same with a little bit of your time invested in some education.If you are feeling weary after reading that, hold on! Good news is that there is a singular index fund, called a target date fund that does all of that (rebalancing and managing risk) for you. With this type of fund you can still elect to self manage, with very little effort needed.
On the other hand, a robo-advisor is a digital tool that brokerage companies will use to help aid you in choosing your investments and managing them. They will do so based off information such as a your age, your investment preferences, how aggressive you want to invest, your target retirement age, etc. This is a great option for those who want some peace of mind as they get started. You will pay slightly more fees to utilize a robo-advisor, but those fees are still very low in comparison to what you will pay a financial advisor.
STEP #5 Link Up your Bank Account
Upon completion of opening the account we will now need to link up your personal bank account so that we can transfer/contribute money into the Roth IRA!
STEP #6 Contribute your first dollars (up to $6.5k in 2023)
Once your bank is linked up, make your first contribution to the account! This can be whatever dollar amount you are comfortable starting with. You can also consider setting up an automatic transaction profile that automatically deposits money into the account on the cadence of your choice! Be aware, the maximum you are eligible to contribute to your Roth IRA in year 2023 is $6,500. Here is what it would take to deposit into the account to “max out” your contributions:
This is arguably THE MOST IMPORTANT PART of opening and investing in your IRA account. You may have noticed when you were opening the account you were notified of a “core position”.
This is the location in which your money comes into the Roth IRA from your bank account, and stays here until you execute an investment trade. This Core Position is likely a money market account, and essentially that is a very low risk investment… similar to a savings. Low risk also means low return, so it’s important to recognize that as long as your money is sitting here, it is not fully invested into the funds that will help us build true wealth.
SO, you must purchase an asset with the money in your settlement fund. To do this, you will first have to decide on which assets you want to invest into. I would highly suggest you spend some time educating yourself on index funds, as they are low fee, high diversification investments. Better yet, if you want to put in as little effort as possible to managing your account yearly, consider investing in a target date fund. “Target date” represents the year in which you aim to retire. For example if I am 25, and aim to retire at 65.. That is 40 years from now, year 2068.. So I would look for a 2065 or 2070 target date fund.
STEP #8 BUY, HOLD, REPEAT
Now that you are up and running, continue to contribute money to your account as frequently as possible, until you’ve contributed the max amount of $6.5k in 2023. Continue to HOLD the investments that you are purchasing, because we have some time between now and retirement, so let your investments run the course, don’t panic in the down years, don’t get out of control in the good years.. We are in this for the long run!
Disclaimer: I AM NOT AND DO NOT CLAIM TO BE A LICENSED OR PROFESSIONAL FINANCIAL ADVISOR / CFP. I AM A FINANCIAL EDUCATOR AND ALWAYS RECOMMEND THAT YOU DO YOUR OWN RESEARCH AS WELL PRIOR TO INVESTING IN THE STOCK MARKET. INVESTING OUTSIDE A BANK OR CREDIT UNION IS NOT FDIC INSURED. YOU MAY LOSE THE VALUE IN THE INVESTMENTS YOU SELECT. ALL INFORMATION PROVIDED HERE IS FOR INFORMATIONAL PURPOSES ONLY & IS MY OPINION. I’M JUST A GAL TRYING TO MAKE INVESTING EASIER TO UNDERSTAND & HELP YOU GAIN THE KNOWLEDGE & CONFIDENCE TO MAKE DECISIONS TO BUILD WEALTH.