| 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, 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 the company provide customer service 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 many 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 your age.
- Consult a financial advisor, either one who works with that financial institution or an independent one of your choice.
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 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 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, moving to safer investment choices as you approach retirement age.
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 that money 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 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.
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.