Content of the material
- The bottom line
- How old do you have to be to open a Roth IRA?
- Minimum Deposit Requirements for a Roth IRA
- Basic Level
- Some Professional Advising
- Advanced Personal Planning and Advice
- I Contributed Too Much to an IRA – What Should I Do?
- Traditional IRA vs. Roth IRA
- What is the deadline to contribute?
- What is an IRA?
- Beware Tax Danger When Transferring Money Into an IRA
- Can I contribute to an IRA if I participate in a retirement plan at work?
- Steps to Opening IRA
- Pro Tip
- How to Open an IRA Account
- View important information about our online equity trades and Satisfaction Guarantee
- Know your limits
- Comparing tax savings: Traditional IRA vs. Roth IRA
- 2. Choosing Where to Open Your IRA
- How much should I contribute to my IRA?
- What Is the Deadline for Making a Contribution to an IRA?
- Dollar-Cost Averaging for IRAs
- 4. Investing the Assets in Your IRA
- Additional resources
The bottom line
IRAs can be a useful tool in planning for retirement. To ensure your IRA investments are as successful as possible, be careful about which type of account you choose and what institution you opt to manage it.
If you’re not sure or just need guidance, talk to a financial advisor or Certified Financial Planner. They can provide advice personalized to your exact goals and finances.
Aly J. Yale Aly J. Yale is a freelance writer, specializing in real estate, mortgage, and the housing market. Her work has been published in Forbes, Money Magazine, Bankrate, The Motley Fool, The Balance, Money Under 30, and more. Prior to freelancing, she served as an editor and reporter for The Dallas Morning News. She graduated from TCU’s Bob Schieffer College of Communication with a focus on radio-TV-film and news-editorial journalism. Connect with her on Twitter or LinkedIn. Read more Read less
How old do you have to be to open a Roth IRA?
There is no age limit with Roth IRAs. You simply must be working and making less than a specific amount of money ($125,000 as a single person or less than $198,000 if you are married and filing jointly in 2022). You can open a custodial IRA for a minor child.
Minimum Deposit Requirements for a Roth IRA
The IRS has no minimum deposit requirements. You can put as little money as you want into a Roth IRA with many brokerages. Each brokerage firm has its own minimum deposit requirements.
Generally, when you have a higher minimum deposit requirement, you also get access to more personalized services like guidance from professional advisors.
Many investment companies like Fidelity and Charles Schwab will allow you to open a Roth IRA with no minimum investment requirement. You’ll manage the investments on your own. These brokerages often provide online planning tools or education materials, but not personalized advice.
Some Professional Advising
Some brokerages offer additional services, but require a higher minimum deposit. For example, Merrill’s Guided Investing requires a $1,000 account minimum and charges a 0.45% annual fee. With this account, you can access an investment advisory platform aligned to your goals.
The Fidelity Go Roth IRA plan has no minimum deposit requirement. But you’ll pay an advisory fee for accounts with more than $10,000 for Fidelity professionals to choose and manage your investments according to your goals.
Advanced Personal Planning and Advice
You can often find more customized investing advice with accounts with higher minimum deposits. If you’ve been saving through your Roth IRA for years, you may have enough money to meet the deposit requirement for these services, which can range from about $20,000 to $25,000.
You’ll typically face an advisory fee with these accounts, which is an annual fee that is a percentage of your invested assets. For example, Merrill advisory fee for an advisor with its Guided Investing Account is 0.85%, while Fidelity charges 0.5% per year for Fidelity Personalized Planning & Advice Roth IRA.
I Contributed Too Much to an IRA – What Should I Do?The rules on excess IRA contributions can be confusing. But if you act early, you can minimize any effect on your taxes.September 28, 2021
Traditional IRA vs. Roth IRA
The differences between a Roth IRA vs traditional IRA mostly come down when you pay taxes on contributions and withdrawals.
If you opt for a traditional IRA, your contributions are tax deductible in whole or in part, depending on your annual income and filing status. Contributions grow tax deferred until withdrawal, at which point they are taxed as regular income.
With a Roth IRA, contributions are made from money on which you’ve already paid taxes. Contributions grow tax free, meaning you won’t owe taxes even when you take them out in retirement. As an additional benefit, you can take out contributions (but not earnings) at any time.
Anyone, regardless of income, can open and fund a traditional IRA. There are income thresholds that prevent higher-earners from directly contributing to a Roth IRA, though they can still access the benefits of a Roth account through a backdoor Roth IRA.
What is the deadline to contribute?
You can contribute to an IRA at any time during the calendar year and up to tax day of the following calendar year. For example, taxpayers can contribute at any time during 2021 and have until the tax deadline (April 18, 2022) to contribute to an IRA for the 2021 tax year. This means that not only do you have to open the account by this date, you must have funded it, too.
But this long contribution window means that as soon as you have your 2021 contributions settled, you can start contributing for 2022, rather than scrambling at the end of tax season in 2023.
And if you file your taxes before you make your contribution? No big deal. As long as you make your IRA contribution before the tax deadline, you can refile your tax return and still get the tax benefit. It’s a little extra work, but definitely worth the hassle for the savings.
What is an IRA?
IRAs are tax-advantaged investment accounts. They offer a range of investments for your money, such as individual stocks, bonds, mutual funds, CDs and cash.
You can open an IRA at most banks and credit unions, as well as through online brokers and investment companies.
If you already make automatic contributions into a 401(k) account through your employer, you may wonder if you also need an IRA. IRAs supplement these other retirement accounts and come with their own advantages. They are accessible and easy to set up, plus individuals can shop around for the right investments for their finances versus being limited to their employer's 401(k) plan. This gives you the flexibility to make your own investment selections, with the guidance of the brokerage firm or bank that manages your account.
You can also set up automatic contributions into your IRA from your checking or savings account. IRAs typically don't come with account setup fees, but you'll likely have to pay transaction and advisory fees when applicable, as well as fund expense ratio fees which cover operational costs.
Before funding an IRA, you need to understand the contribution limits and tax implications. How much you can contribute and deduct from your taxes depends on your age, income, tax filing status and whether or not you have a retirement plan through your employer.
Below are two handy resources from the IRS website that help guide you through how much you can contribute to an IRA and how much of it can be tax-deductible:
- IRA Contribution Limits: There is a maximum dollar amount you can contribute to your IRA each year, and it's determined by the federal government. In 2021, the limit is $6,000 if you're younger than 50 and $7,000 for those 50 and older.
- IRA Deduction Limits: There are also limits on how much of your IRA contribution you can deduct from your individual federal income tax return. This only applies to traditional IRAs as Roth IRA contributions are not tax-deductible. You cannot make a deduction if you (or your spouse, if married) have a retirement plan at work and your income is $76,000 or more as a single filer/head of household, $125,000 or more as married filing jointly/qualifying widow(er) or $10,000 or more as married filing separately. If you (and your spouse, if married) do not have a retirement plan at work, you can make a full deduction up to the amount of your contribution limit.
Beware Tax Danger When Transferring Money Into an IRA
When you change jobs or retire, you can choose to roll your 401(k) into a traditional IRA. But be careful: If the company cuts a check payable to you, 20% of the funds will be withheld for taxes.
Can I contribute to an IRA if I participate in a retirement plan at work?
You can contribute to a traditional or Roth IRA even if you participate in another retirement plan through your employer or business. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.
- Danny, an unmarried college student earned $3,500 in 2020. Danny can contribute $3,500, the amount of his compensation, to his IRA for 2020. Danny’s grandmother can make the contribution on his behalf.
- John, age 42, has a traditional IRA and a Roth IRA. He can contribute a total of $6,000 to either one or both for 2020.
- Sarah, age 50, is married with no taxable compensation for 2020. She and her spouse, age 48, reported taxable compensation of $60,000 on their 2020 joint return. Sarah may contribute $7,000 to her IRA for 2020 ($6,000 plus an additional $1,000 contribution for age 50 and over). Her spouse may also contribute $6,000 to an IRA for 2020.
Steps to Opening IRA
First off, opening up an IRA shouldn’t scare you. With just your name, address and Social Security number, you can open up an investment account in 10 minutes at a brokerage account. NextAdvisor recommends online brokerages including Fidelity, Charles Schwab, and Vanguard. These brokerages tend to offer lower fees for their investments than full-service brokers, and are beginner-friendly.
Pro Tip Avoid IRA products offered by banks, since they tend to offer more conservative investments. Instead, open an IRA with an online brokerage.
Before you open an account, figure out which type of investment account you’d like. A Roth IRA is a good option for beginner investors, since your account grows tax-free.
Once your account is open, you need to fund it. Most brokerage accounts let you link your debit card to your account for easy transferring. Once there is money in your account, you need to invest it. Don’t make the mistake of missing this step — you need to invest your money once it’s deposited.
How to Open an IRA Account
Before you open a traditional IRA, decide whether you’re an investor who would prefer to manage an IRA account by yourself or if you’d rather have a more hands-off approach in which someone else manages your account for you.
If you like following markets, trading stocks and planning your investment strategy, a hands-on approach to your IRA would probably be best. Check out the brokerage platforms that we suggest above for self-directed investors.
Hands-off investors still need to pay a certain level of attention to their IRA investments, but they’re perfectly happy letting a robo-advisor create an investment portfolio and manage it for them. (You could also get the best of both worlds, so to speak, by investing in a target-date fund in a self-directed IRA account.)
There are other ways to open an IRA and save for retirement. You can opt to hire a financial advisor to plan out your retirement strategy, and they can open an IRA and manage the account for you, though this will be costly. Banks also offer IRAs, although they tend to be limited to holding certificates of deposit (CDs).
View important information about our online equity trades and Satisfaction Guarantee
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Know your limits
When you have earned income, you can contribute it to an IRA up to the maximum annual limit of $6,000 in 2022. If you’re 50 or older, you’re allowed to contribute an additional $1,000. If you have more than one IRA, the total contribution to all your IRAs can’t exceed the annual limit.
The Secure Act removed the age limit in which an individual can contribute to an IRA. As long as you are still working, there is no age limit to be able to contribute to a Traditional IRA. With Roth IRAs, you can contribute at any age as long as your earned income falls within the allowable income limits. If you are unsure of how much you can contribute, use our calculator.
Comparing tax savings: Traditional IRA vs. Roth IRA
If you’re looking for last-minute tax savings this year, you’ll want to make sure that you select the right IRA – the traditional IRA. But you should watch out because there’s another kind – the Roth IRA – that gets you tax savings in the future, rather than today.
The traditional IRA offers you a tax break today in exchange for allowing your investments to grow tax-free until retirement. When you withdraw your money in the future, you’ll pay taxes on the distributions.
In contrast, the Roth IRA gives you a future tax break because you’re saving with after-tax money today. With the Roth IRA, your investments grow tax-free and you won’t pay any taxes on qualified withdrawals later.
While these are the most substantial differences between the two IRAs, there are further differences that you’ll want to understand before making a final choice.
2. Choosing Where to Open Your IRA
You can open an IRA at most banks, credit unions and other financial institutions. However, IRAs are also available through online brokers, mutual fund providers and other investment companies, such as Vanguard and Fidelity. Each of these options has its respective benefits and downsides.
If you open an IRA through an online brokerage, you may end up with strong returns. In order to generate this growth, however, you’ll need to choose investments and manage your portfolio. When selecting a brokerage to work with, consider trading fees and minimums, as well as the quality and usability of their online and mobile platforms. Fees are especially important, as any charges will directly affect your retirement funds.
You may also consider working with a robo-advisor if you are a hands-off investor. Just like with a brokerage, compare fees and services to make sure your needs are met. Many robo-advisors rebalance portfolios and allocate assets to balance risks and rewards automatically. Others, however, may also give you access to a financial advisor.
If you set up an IRA at a bank or credit union, your account will probably take the form of an IRA CD. CDs, or certificates of deposit, often have lower yields than investments. On the bright side, though, they allow you to minimize risk by guaranteeing your rate of return over time.
How much should I contribute to my IRA?
There are strict contribution limits, so you can only deposit a certain amount of money into your IRA each year.
Both traditional and Roth IRAs have the same contribution limits: For 2021, those under age 50 can make a total contribution into their traditional and Roth IRAs of up to $6,000. Those 50 or older have a limit of $7,000.
With traditional IRAs, you can contribute regardless of how much money you earn, but with Roth IRAs there are income limits. High-earners may not be eligible to open or contribute to a Roth IRA. Here are the 2021 income thresholds for contributing to a Roth IRA:
- Married filing jointly or qualifying widow(er): Not eligible if your modified adjusted gross income is $208,000 or more
- Single, head of household or married filing separately (and you didn't live with your spouse at any time during the year): Not eligible if your modified adjusted gross income is $140,000 or more
- Married filing separately (if you lived with your spouse at any time during the year): Not eligible if your modified adjusted gross income is $10,000 or more
What Is the Deadline for Making a Contribution to an IRA?
IRA contributions can be made up to the due date for filing your tax return for that year. For example, for most people, that means 2021 contributions must be made by April 15, 2022. If you make contributions for 2021 between Jan. 1 and April 15, 2022, be sure to tell your plan sponsor which year the contribution is for because you can also start contributing for 2022 on Jan. 1, 2022.
Dollar-Cost Averaging for IRAs
Dollar-cost averaging (or systematic investing) is the process of spreading out your investment over a specific time period (a year, for our purposes). It’s a disciplined approach that’s tailor-made for IRA contributions.
With dollar-cost averaging, you invest a certain amount of money into your IRA on a regular schedule. The key thing is you invest that money, generally into either a mutual fund or a stock, regardless of what the investment’s share price is. Some months, you’ll end up buying fewer shares per dollar investment when the share price rises.
But in other months, you’ll get more shares for the same amount of money when prices fall. This tends to level out the cost of your investments. You end up investing in assets at their average price over the year—hence, the term dollar-cost averaging.
Spreading out when you invest is a good idea, especially if you’re risk-averse. It effectively reduces the average cost basis of your investment—and hence, your breakeven point, an approach known as averaging down.
Here’s an example. Let’s say you have $500 to invest in a mutual fund every month. In the first month, the price is $50 per share, so you end up with 10 shares. The next month, the fund’s price falls to $25 per share, so your $500 buys 20 shares. After two months, you would have bought 30 shares at an average cost of $33.33.
Using dollar-cost averaging, you only need to commit $500 per month in order to reach the annual limit, or $250 every two weeks, if you invest on a paycheck-to-paycheck basis.
4. Investing the Assets in Your IRA
Opening an IRA at a bank involves very little decision-making, as you can simply go for the best CD rates and terms you can find. If the possibly stronger returns of a brokerage-based IRA intrigue you, be ready to make some further decisions.
After your IRA is ready, the final thing to do is choose your investments. More specifically, you’ll need to select from an array of mutual funds, bonds, stocks, exchange-traded funds (ETFs) and more. Those nearing retirement often stick to bonds, ETFs and cash allocations, whereas anyone who’s a ways away from retiring can afford to be riskier in the interest of higher returns.
If you’re new to investing, mutual funds and ETFs tend to be the simplest options. A mutual fund typically holds a pool of assets, including stocks, bonds and money market funds. ETFs work similarly, only they tend to focus on specific risk tolerances and market sectors. Both are professionally managed for you when you buy into them.
While you’re more than welcome to manage your own IRA investment portfolio, it might be worthwhile to have a financial advisor help you. Advisors can also aid you in building a long-term financial plan that covers things like college savings, estate planning, tax planning and more.
- Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
- Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
- IRA Deduction Limits
- Retirement Plans FAQs regarding IRAs
- IRA Year-End Reminders