Getting Started with a Roth IRA: Your 6-Step Guide
Understanding the Basics of a Roth IRA
A Roth IRA is a type of retirement savings account that offers tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars. This means you pay taxes on the money before you deposit it into your account.
People often choose Roth IRAs for their flexibility and tax benefits. It's important to understand how these accounts work before deciding if they are right for you.
A Roth IRA is an account type, not an automatic investment. Contributing is just the first step. If you want to build wealth over time, you also need to invest that money- which I will break down in this guide!
Financially & Mentally Prepare.
Before you start investing, you need to make sure you are financially and mentally prepared. Here is a checklist to ensure you are ready:
- You have paid off high interest debt (anything over 8%)
- You have an emergency savings fund in place for unexpected expenses
- You are NOT seeking instant gratification
- You are patient & understand investments take time to grow
If you have checked all these boxes, you are ready to open a ROTH IRA & start investing!
1. Determine your Eligibility
Not everyone can open a Roth IRA. Your eligibility depends on your income level and filing status. The IRS sets income limits that determine who can contribute to a Roth IRA each year. It's crucial to review these limits annually to ensure you qualify.
If your modified adjusted gross income (MAGI) is below $146,000 (single filers) or below $230,000 (married filing jointly), you can contribute the full amount the IRS allows to a Roth IRA — $7,000 for those under 50 and $8,000 for those 50 and older. At incomes above the limits, the amount you can contribute becomes smaller until you are no longer eligible.
2. Choose a Provider & Open your Account
Many financial institutions offer Roth IRAs, including banks, credit unions, and investment firms. When choosing a provider, consider factors such as fees, investment options, and customer service. I encourage Vanguard, Robinhood, or SoFi as brokerage options!
Step 3: Choose an investment that aligns with your goals
With a Roth IRA, you have a wide range of investment options. These include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Your investment choices should align with your risk tolerance and retirement goals.
Some providers offer Robo Investment Options which are a great option for beginner's looking to get started with a diversified and balanced option.
Index Funds and ETF's are a cost effective and a simple way for you to diversify without needing to do the work yourself!
For those with a long term time horizon (12+ years) a very common and great option in the US is the VOO: Vanguard S&P 500 ETF.
Step 4: Start Small and Automate your investment.
After opening your Roth IRA, the next step is to fund it. I encourage setting up automatic regular contributions on a bi-weekly or monthly basis from your checking or savings account. This can help you stay on track, be consistent and take advantage of Dollar Cost Averaging.
If you're new to investing, start with a small amount of money. This allows you to learn, gain experience and easily get started. As you become more comfortable or start earning more, you can increase your investments!
Step 5: Set It & Forget It.
Don't obsess- set it & forget it.
The market will fluctuate, don't obsess and continuously try to time the market or get emotionally attached to the ups & downs. You are investing for the long term!
Step 6: Monitor, Adjust & Build Momentum.
Now I do encourage review your account at least once a year to ensure it aligns with your retirement goals and increasing your contributions if you have the ability to! It also helps you to build momentum and see how far you have come.
By following these steps, you can start building a secure financial future with a Roth IRA. Remember, investing is a long-term journey! The earlier you start, the better.