How and Where to Start the Roth IRA Account Opening Process? - Retirement Planning

Retirement planning can be tricky, but retirement accounts like the IRA simplify the hassle. An individual retirement account (IRA) is a tax-advantaged account that can offer you tax benefits and secured savings for your retirement. An IRA can help you save for your retirement in a systematic manner each year. A lot of people procrastinate on retirement planning, mainly because retirement seems to be an event in the distant future. The many years between now and retirement may convince you to postpone your preparation. But putting things off for later only increases the burden. It may be better to start planning for your golden years from the very start of your career. One way to do this can be by opening an IRA.

There are two types of IRAs – a traditional IRA and a Roth IRA. They both offer the same benefits, more or less, with the exception of how they are taxed. The contributions in a Roth IRA are made from your after-tax dollars. This means that your contributions grow tax-free, and your withdrawals are tax-free in retirement. Contrary to this, the contributions in a traditional IRA are made from your pre-tax dollars. As a result, your contributions are tax-deferred, and you pay tax on your withdrawals in retirement. A Roth IRA can be more suitable than a traditional IRA if you would rather pay tax now and save up in retirement. Roth IRAs are ideal if you expect to be in a higher tax bracket in retirement. This way, you can save money by paying lower taxes now than you would in the future. If you wish to learn about Roth IRAs in detail, contact a professional financial advisor who can guide you on the same.

If you think a Roth IRA is the perfect match for your retirement, here are some things to know about its features, limitations, and, most importantly, how and where to start a Roth IRA.

Roth IRA: How to start

The Roth IRA account opening process is extremely simple and quick. However, there are a few steps that you must follow:

1. Check if you are eligible:

Not everyone can open an IRA. The eligibility to open an IRA depends on your MAGI or modified adjusted gross income. MAGI is calculated on the basis of your adjusted gross income (AGI) after removing any allowed deductions and tax penalties. Roth IRAs have fixed limits for MAGI. So, you can only qualify to contribute if your MAGI is within the limit set by the Internal Revenue Services (IRS). Here are the limits for 2022:

If you are single, head of household, or married but filing your taxes separately and do not live with your spouse, you can contribute up to the full contribution limit if your MAGI is less than $129,000. Additionally, you can contribute a reduced amount if your MAGI is between $129,000 and $144,000. However, if your MAGI is equal to or more than $144,000, you would not be able to contribute anything.
If you are married but filing your taxes separately, and you live with your spouse, you can contribute a reduced amount if your MAGI is less than $10,000. However, if your MAGI is equal to or more than $10,000, you would not be able to contribute anything.
If you are married but filing your taxes jointly, you can contribute up to the full contribution limit if your MAGI is less than $204,000. Additionally, you can contribute a reduced amount if your MAGI is between $204,000 and $214,000. However, if your MAGI is equal to or more than $214,000, you would not be able to contribute anything.

If you fall between these income brackets, you can go ahead to the next step. If not, you would not be able to open a Roth IRA. In this case, you can consider only similar investment options for retirement planning and discuss the same with your financial advisor.

2. Find the best place to open a Roth IRA:

If you are wondering “where can I open a Roth IRA”, you should know that a Roth IRA is a flexible account that can be opened in multiple places. Unlike a 401(k) that has to be opened by the employer, you can open a Roth IRA at a bank, a credit union, a life insurance company, a mutual fund house, or a broker. If you already have a traditional IRA, you can consider opening a Roth IRA with the same company. If not, you can consider different aspects like fees, customer service, types of investments offered, etc., and then take a call. The choice can also depend on your risk appetite. Banks and credit unions may offer relatively low-risk options like money market accounts, certificates of deposits, etc. In contrast, brokers and mutual fund houses may provide a more comprehensive selection suited for high-risk appetites, such as stocks, exchange-traded funds, etc. You can also open a self-directed Roth IRA.

There is no single best place to open a Roth IRA. Every investor is different, so you should consider picking a place according to your unique needs. It can help to conduct a small study or comparison. You can look at online reviews, fees, and customer services offered by different banks, life insurance companies, mutual fund houses, credit unions, and brokers and accordingly make a decision.

3. Complete the application form:

Once you have picked a suitable place to open your Roth IRA, the next step entails filling out the application form. You would need to fill in the following information:

Your name
Your bank account information like savings account number, bank’s routing number, etc.
Your Social Security number
The name and address of your employer
The name, address, and Social Security number of your beneficiaries

Filling the form is a very critical step in the process. Make sure that you enter accurate information, including the names of beneficiaries. Give some thought to the selection and make sure that you update the name of the beneficiary if need be to reflect your wishes. In addition to the application form, you also have to fill out the IRS form, known as Form 5305-R.

4. Choose investments for your account:

A Roth IRA is a combination of different investments. These investments decide the fate of your future to a great extent. Hence, it is essential to be very careful when selecting your options. The primary focus here can be on diversification to lower risk and improve the chance of earning gains. Keep in mind to pick options based on factors such as your investment portfolio outside of the IRA, your risk appetite, your investment budget, your retirement goal, etc. For instance, stocks may be ideal if you have a high-risk appetite. On the other hand, risk-averse investors may benefit more from adding bonds. Your age will also determine your selection. Typically, investors nearing retirement are recommended to invest in bonds over stocks to reduce risk and volatility. You can also consider buying a target-date or life-cycle fund, which consists of a combination of stocks and bonds that automatically change the asset allocation as you move closer to retirement. This removes the responsibility of making changes from your shoulders.

No matter what you choose, try not to duplicate investments and pick the same ones you may already be investing in outside your IRA. You can also take the help of a financial advisor in this step. A financial advisor can help you make sound investment decisions by offering professional insight on the matter.

5. Set up the schedule for your contributions:

You can contribute to a Roth IRA every month or once a year. The choice is yours. However, you have to set up a frequency. Moreover, irrespective of what you select, make sure that you follow the IRS contribution and MAGI limits.

Things to keep in mind for Roth IRA account opening process

In order to gain fully from a Roth IRA, here are some rules and tips that you must know of and follow:

A Roth IRA offers tax-free withdrawals in retirement only if you withdraw your money after the age of 59.5. In addition to this, you must also hold the account for a minimum of five years before making withdrawals. This is also applicable to conversions. So, if you opened a traditional IRA 20 years ago but converted it to a Roth only four years ago, you would have to wait another year to complete the five-year holding period. If you break these rules, you incur a 10% penalty.
You should open a Roth IRA only if you foresee that you will move to a high tax bracket in the future. The Roth IRA is a tax-advantaged account that offers tax-free withdrawals in retirement. If you are in a higher tax bracket now, you may benefit more from a traditional IRA instead.
You can only contribute as much as you earn in a year. You cannot contribute more than you earn, irrespective of the IRS contribution limits. For instance, if you earn $4,000, you cannot contribute $6,000, even though the IRS can set this limit for 2022. The IRS only considers your earned income from a job. It does not include income from a rental property, investment returns, stock dividends, pension, gifts, etc.
Unlike a traditional IRA, a Roth IRA does not have mandatory Required Minimum Distributions (RMDs) after the age of 72. So, you can plan your withdrawals yourself as you see fit. This is why a Roth IRA is also commonly used as an estate planning tool that is passed on to the beneficiaries.
You can open a spousal or custodial IRA for a spouse or a child. A spousal IRA can be opened even if your spouse does not earn an income. In this case, you can contribute on your spouse’s behalf. However, in the case of a custodial IRA, the child should be earning an income from a part-time job. Custodial IRAs can be great for setting aside funds for a child’s future education expenses.

To conclude

Now that you know how to open a Roth IRA and the rules of maintaining the account, you can go ahead and open one for yourself. However, keep in mind to follow the directions of contributions, withdrawals, etc., to avoid penalties. In addition to this, it is also advised to carefully evaluate your goals, age, and risk appetite while selecting your investment options. If you find this difficult, you can consider hiring a financial advisor near you.

A financial advisor can help you in picking investments as well as assist you in the account opening process. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.

To learn more on Roth IRAs and if they are a suitable retirement savings option for your financial needs, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

To learn more about suitable retirement accounts for your unique retirement needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.