If saving for retirement is at the top of your agenda, you’d be remiss not to explore the benefits of opening up a Roth IRA. While you won’t find instant tax savings in initiating this type of investment account, once you reach retirement age, there are no tax implications for withdrawing from your Roth IRA.
Before discussing the steps to open a Roth IRA, it’s necessary to first understand what it is. An IRA stands for “individual retirement account.” The Roth account is specially tailored for the benefit of retirees because it permits you, the investor, to withdraw from the account after you retire. The Roth IRA, which is similar to the traditional IRA, has only been around since 1997.
The Roth IRA principally differs from the Roth IRA in the way it’s taxed. The funds you contribute to your Roth IRA are after-tax dollars, which means they are not tax-deductible. The Roth is distinct from traditional IRAs in this regard because their deposits consist of pretax dollars. With this type of account, you can claim a tax deduction on the contributions made. You will, however, pay income tax once it comes time to withdraw from a traditional IRA in retirement.
As to the Roth IRA, it can be opened in five simple steps. The first step is to assure that you’re eligible. If you’ve earned income over an entire year, you should be able to open a Roth account without issue. There are income limits that impact your ability to contribute, with the phase-out rate starting at $125,000 annually and ceasing entirely at $140,000 for 2021. Likewise, you can only contribute $6000 to an IRA with an additional $1000 if you’re 50 years of age or older. Next is deciding where to open up a Roth IRA account. Most investment firms offer them. If you have a traditional IRA, that same brokerage can open a Roth IRA on your behalf.
Once you’ve decided on your investment company, you simply fill out the appropriate paperwork in the third step. In most situations, you’ll complete the forms online. Once you’re set up with the account, the fourth step is to make a decision, with the help of your brokerage, on how you want the funds invested. This is admittedly the most difficult part of initiating your Roth. The fifth and final step is to create your contribution schedule. The two primary ways of going about this are to set up a monthly contribution from your bank account, or, conversely, you can make contributions to the account annually.
In their article about how to choose a Roth IRA by SoFi, “in weighing which is better, traditional or Roth IRA plans, it’s important to consider what you need each plan to do for you.” According to the experts at SoFi, investing in either a traditional IRA, Roth account, or both at once should benefit almost everybody who qualifies.
Regardless of which type of IRA you chose, it’s a great way to bolster your retirement fund while finding tax savings at the same time. While most analysts agree that everyone should have an IRA if eligible, you should consult with your trusted advisor to ensure that you’re choosing the best account as it pertains to your tax bracket.