Roth IRAs are one of the best ways to save for retirement. Though there’s no upfront tax benefit, you get tax-free income in retirement—even on the earnings that have accumulated over the years. There are also no required minimum distributions (RMDs) for Roth IRAs during your lifetime. That means you can let the money keep growing until you need it, or even leave tax-free income to your beneficiaries.
The steps to open a Roth IRA are simple:
- Make sure you're eligible
- Decide where to open your Roth IRA account
- Fill out the paperwork
- Choose investments
- Set up a contribution schedule
Learn more about how to open a Roth IRA and start saving.
Key Takeaways
- Opening a Roth IRA is easy as long as you have all the required information and documentation.
- Roth IRAs provide no upfront tax benefit but do providetax-freeincome in retirement.
- Your contributions must come from earned income in order to qualify.
- Roth IRAs come with norequired minimum distributionsduring your lifetime.
- Be sure to review the financial institution where you'll open your account as well as your investment choices.
Why Open a Roth IRA?
The Roth is especially beneficial for younger people who typically have lower income tax rates than they are likely to have when they withdraw Roth IRA funds. They also have decades for their money to compound before retirement, allowing them to take greater advantage of compound interest.
There are no age limits for creating a Roth IRA, so you can open an account for a child of any age, provided that they have a Social Security number (SSN) or tax identification number (TIN) and income. In fact, it's really easy for anyone to open a Roth account online or in person with the right documentation and information.
1. Make Sure You’re Eligible
Most people are eligible to contribute to a Roth IRA as long as they meet some basic requirements. These include earned income for the year (without exceeding the maximum limit) and a form of taxpayer identification, such as a Social Security number or a tax identification number—one of which you'll need if you have earned income. If you need to reduce your contribution, you can use our Roth IRA calculator to determine the correct amount.
If you're considering contributing to one, keep in mind that there are income limits based on your modified adjusted gross income (MAGI):
- For the 2024 tax year:The phaseout range for an individual is $146,000 to $161,000. For couples, it is $230,000 to $240,000.
There are also limits to the maximum amount you can invest in a Roth IRA each year:
- For the 2024 tax year:The annual contribution increases to $7,000. If you are 50 years old or older, you can contribute an additional $1,000.
| Roth IRA Income Limits for 2024 | ||
|---|---|---|
| If your filing status is... | And your 2024 modified AGI is... | You can contribute |
| Married filing jointly | <$230,000 | Up to the limit |
| ≥$230,000 but < $240,000 | A reduced amount | |
| ≥$240,000 | 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 | <$146,000 | Up to the limit |
| ≥$146,000 but < $161,000 | A reduced amount | |
| ≥$161,000 | Zero | |
Source: Internal Revenue Service.
You can't contributemore than yourearned incomefor the year.For example, if you only earn $5,000, that's the most you can contribute. Investment income from securities, rental properties, or other assets is considered unearned income, so it doesn't count.
2. Decide Where To Open Your Roth IRA Account
Almost all investment companies offer Roth IRA accounts. If you have an existingtraditional IRA, the same company can probably open a Roth IRA for you. The best Roth IRA accounts have low fees, low account minimums, goal-setting features, retirement calculators, and investment options.
Ask these questions as you decide where to open the account:
- Is there a fee to open or maintain it?
- Does the company provide customer service online or by telephone?
- Does the company offer the types of investments you're looking for, whether that means exchange-traded funds (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.
Note
The financial institution you open the account with iscalled a custodian because it takes custody of your money.
3. Fill out the Paperwork
Most banks and brokerages have websites 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 (SSN)
- 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 SSN 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.
You will need to complete Form 5305-R for the Internal Revenue Service (IRS) as part of the application.
4. Choose Investments
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. There are three basic approaches to choosing investments for your Roth IRA.
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 with risk and your time horizon to retirement. Many people put more of their investments into bonds as they get older because bonds are more stable than stocks. On the other hand, stocks historically have produced higher returns over the long term, so there’s a tradeoff.
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 mutual funds orETFs—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 0.5% to 0.75%. That fee is in addition to the fees you may pay the bank or brokerage for the account itself.
Buy a Target-Date Fund or Life-Cycle Fund
These funds, which consist of a mix of stocks and bonds, are designed to automatically adjust over time, moving to safer investment choices as you approach retirement age. Some examples from well-known fund families are Fidelity Freedom Funds and Vanguard 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 those of other investments.
Consult a Financial Advisor
Choose an advisor who works with a financial institution or another independent professional of your choice. 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, ask questions so you know what you're getting and whether it's appropriate for your goals.
5. Set up a 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 for the following year, typically April 15.
Remember,contributions to Roth IRAsare 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 that money will go to work for you.
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.
After You’ve Opened Your Account
Be sure to read your regular account statements and take time to carefully re-evaluate your investment choices at least once a year. You may want to buy and sell investments at that point to rebalance your account.
As markets rise and fall, the value of your investments will change over time. 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 may now be 40% bonds and 60% stocks. In this case, you may want to sell some bond fund shares and use the proceeds to buy more stock fund shares.
The more investments you own, the more complicated rebalancing will be. This typically becomes more important the closer you are to retirement when you 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 find it hard to set aside money for retirement, there is a nonrefundable tax credit that can help you save. Commonly referred to as the saver's tax credit, it gives people with modest incomes additional tax breaks from those they would normally receive just by depositing money into a retirement account like a Roth IRA.
Requirements for Undocumented Immigrants Working in the United States
There's a misconception that only U.S. citizens can open Roth IRAs or other retirement accounts. That isn't true. Anyone with earned income, including nonresident aliens and undocumented workers in the United States, can open and contribute to these accounts. In order to participate (and have what the IRS classifies as earned income), you need an SSN or a TIN.
Both are unique identifying numbers that allow people to pay taxes but they aren't the same. While an SSN allows citizens and certain residents to work and pay taxes, the individual TIN is available to anyone who can't get an SSN, such as foreign nationals, their spouses, and their dependents. This also includes undocumented workers.
Most financial institutions require an SSN to access banking and investment services. But you can open bank and retirement accounts with an ITIN, which is issued regardless of immigration status. If you don't have an ITIN, you can apply for one by submitting Form W-7 to the IRS. You may be able to find some financial institutions that don't require either identifier to open an account—a quick search online can help you find them.
Keep in mind that the application is only used to apply for or renew a TIN so you can pay taxes or claim a tax treaty benefit. As such, the IRS does not use them to report any information to immigration authorities. And your immigration status cannot bar you from opening a bank account.
Finally, be mindful that there may be restrictions on taking distributions from your IRA depending on your immigration status. If you are a U.S. citizen or resident alien and your home address is outside the United States, you can't choose an exemption from withholding on traditional IRA distributions. To choose exemption from withholding, you must certify that you aren't a U.S. citizen, a resident alien of the United States, or a tax-avoidance expatriate.
How Does This Affect the Wealth of Undocumented Immigrant Communities?
Navigating finances and saving can be very challenging for U.S. citizens and residents. However, it may be even more complicated for undocumented immigrants because of the myths and lack of information available.
As noted above, there is a general misconception that immigrants, including undocumented ones, cannot access banking services and are not allowed to save money the same way citizens and other residents can. That is untrue.
Similarly, there is no citizenship requirement to invest your money. This means you can own stocks and may also be able to have other kinds of investments like Roth IRAs. Just be sure to check with the custodian about what they require to open your account.
If you are concerned about what it means to your potential to save as an undocumented immigrant, including retirement, beneficiary designations, and the types of accounts you'd like to open, be sure to consult a fiduciary. They are required by law to act in their client's best interests and can help guide you to make the right decisions for your situation.
Frequently Asked Questions (FAQs)
Who Can Open a Roth IRA?
As long as you have earned income, you can open and contribute to a Roth IRA. The exception is if your earned income for the year exceeds the limits set by the IRS.
Where Can I Open a Roth IRA?
Almost all brokerage firms, banks, and investment companies offer Roth IRAs. Many online brokerages offer Roth IRA accounts, and some are better than others. We put together a list of the best Roth IRA brokers to make the process easier.
Can I Open a Roth IRA for My Child?
Yes, you can open a Roth IRA for your child, provided that your child has a Social Security number or tax identification number. To do so, you’ll need to set it up as a custodial account, which is an account controlled by someone over 18 for a minor.
How Much Money Do I Need to Open a Roth IRA?
The minimum amount to open a Roth IRA varies depending on the financial institution. But many, particularly online brokers, don’t require a minimum amount of money to open an account.
The Bottom Line
Individuals who anticipate that they will be in a higher tax bracket when they’re older may benefit from a Roth IRA. Thisindividual retirement account (IRA) allows you to withdraw money tax-free as long as certain conditions are met.
Roth IRAs are similar totraditional IRAsbut are taxed differently. The accounts are funded with after-tax dollars, and so do not offer the upfront tax break of a 401(k) or traditional IRA. On the other hand, with a Roth IRA, you can withdraw your contributions (but not earnings) tax- and penalty-free at any time. If you have a SSN or an ITIN—even if you're an undocumented immigrant—you can enjoy the benefits of saving for retirement with a Roth IRA.
Article Sources
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Part of the Series
Open a Roth IRA for Someone Else
The Basics
- Roth IRAs and Family: What You Need to Know
- How to Open a Roth IRA
CURRENT ARTICLE
- Funding a Roth IRA
- How Often to Contribute
Marriage and Roth IRAs
- How Getting Married Affects Your Roth IRA
- Can You Open a Roth IRA With Your Spouse?
- Open an IRA for Your Spouse
- Can I Contribute to an IRA If I’m Married Filing Separately?
- Inheriting a Spouse’s Roth IRA: Which Option to Choose
- Making Spousal IRA Contributions
Parents and Children
- Inheriting a Parent’s Roth IRA: Which Option To Choose
- Can You Open a Roth IRA With Your Child?
- Starting a Roth IRA for Your Child
Supporting Your Household
- Using an IRA to Buy a House
- Borrowing from a Roth IRA
- How To Transfer a Roth IRA
- Can I Invest Social Security Disability Payments in a Roth IRA?
- Real Estate Investing vs. Roth IRA
