An IRA is a tax-advantaged account that allows you to save for retirement and dramatically lower your tax bill. With a standard IRA, you enjoy the tax savings today in the form of a tax deduction but you will pay taxes on the withdrawals you eventually make. A Roth IRA is different because you invest money after taxes but you will pay no income taxes on your withdrawals in retirement.
When you decide that a Roth IRA is right for you, it’s time to navigate the roadblocks and confusing rules to claim these tax benefits yourself. The good news is opening an IRA is not as complicated as you may think once you understand the qualifications and contribution rules.
Do You Qualify?
Not everyone can open a Roth IRA, but there’s a good chance you qualify. An IRA is designed to help lower- and middle-income people save for retirement so there are income limits. You can open and contribute to a Roth IRA as long as your taxable income and modified adjusted gross income (AGI) is:
- Under $184,000 if you are married filing jointly
- Under $132,000 if you are head of household, single, or married filing separately if you didn’t live with your spouse during the last year
- Under $10,000 if you are married filing separately and you did live with your spouse at all during the last year
Roth IRA contributions also begin to phase out before you hit these limits so you will not be able to fully contribute to your IRA if you approach the limit.
How Much Can You Contribute?
It’s also vital that you understand how much you are allowed to contribute to your IRA once it’s opened. If you are under 50, you can contribute up to $5,500 per year in a Roth IRA. If you are married, each spouse can contribute $5,500 per year, even if only one spouse is working. This limit is not per IRA: it applies for any Roth accounts you may have.
The IRS allows people who are 50 and older to make additional “catch up” contributions toward retirement. At 50 and beyond, you can contribute an extra $1,000 per year, or a total of $6,500.
How to Start a Roth IRA
Once you’re sure you’re eligible, you can open a Roth IRA. Nearly all investment firms, including banks, credit unions, and brokerages, offer Roth IRA accounts. It’s a good idea to compare accounts among several top-rated investment companies as the fees and investment options can vary quite a bit.
You can apply for an open a Roth IRA entirely online by answering a few easy questions and providing necessary documents. To open an IRA, you will need:
- Your driver’s license or government-issued photo ID (such as a passport or passport card)
- Your Social Security number
- Your bank account information
- Employment information
- Money to open the account. Depending on the financial institution, you will need anywhere from $25 to $3,000 to open an IRA.
After the application process, you will be asked to transfer money to your account. From there, you can set up automatic investments.
It may take up to a few weeks before you can use your account and begin trading as your deposit will need to clear the bank.