Not saving for your future? A Roth IRA may be for you

Roughly 50% of American adults in the workforce have access to a employer-sponsored 401(k) retirement plan through their employer, making it a lot easier to save money for the future. These regular contributions to retirement portfolios is not taxable income, and for those whose company offers a match, employees are essentially getting free money as well.

The concept is an easy one:

· Money comes out automatically each and every month.

· Money will be invested for your retirement, usually in your choice of a variety of mutual funds.

· You can invest a portion of your salary, up to an annual limit.

But what about the half of the American workforce without access to this retirement plan option? Some financial advisors suggest a Roth IRA.

What is a Roth IRA? In simplest terms, it is a tax-free account that you can put in $6,000 a year max if you’re under age 50, $7,000 if you’re 50 or older. Money can be added month by month based off what your budget allows or pay period by pay period. You can start with just $1.

You can get started on your way to building a more financially secure retirement in just five easy steps. Here’s how to start.

How to Open a Roth IRA: Table of Contents

Determine Your Eligibility

There are income limitations on who can contribute to a Roth IRA, however, most people should make the cutoff.

If your tax filing status is single:

You can contribute fully to a Roth IRA if your modified adjusted gross income (MAGI) is less than $124,000 a year.
If your MAGI falls between $124,000-$139,000, you can contribute a reduced amount.
You cannot contribute to a Roth IRA if your MAGI is more than $139,000 a year.

If your tax filing status is married filing jointly:

You can contribute fully to a Roth IRA if your joint modified adjusted gross income (MAGI) is less than $196,000 a year.
If your joint MAGI falls between $196,000-$206,000, you can contribute a reduced amount.
You cannot contribute to a Roth IRA if your joint MAGI is more than $206,000.

If you fall in the gray area where you are allowed to make only a reduced contribution, you can figure out how much that is by checking the IRS formula.

Pick a Provider

Money expert Clark Howard likes discount investment houses like the Vanguard Group, Fidelity Investments and Charles Schwab as places for you to open a Roth IRA.

Vanguard

The Vanguard Group is a registered investment advisory based in Valley Forge, Pennsylvania, with $6.2 trillion in global assets under management as of January 31, 2020.

Known for its low fees
Client-owned structure where the people who own its funds are the owners of the company
You can begin investing in select funds with $1,000
However, most funds require a minimum of $3,000
No physical office locations for customers

Fidelity

Fidelity Investments is a multinational financial services corporation based in Boston, Massachusetts, with $3.3 trillion in assets under management as of June 2020.

Offers the industry’s first-ever no-fee index funds
Known for its low fees
You can begin investing with no minimum in many funds
However, some funds require a minimum of $2,500
Ten regional offices and more than 190 financial planning offices for customers
See a complete list of office locations here

Charles Schwab

This bank and brokerage firm based in San Francisco, California, had $4.3 trillion assets under management as of July 31, 2020.

Known for its low fees
No account minimum to open most accounts
More than 300 locations across the country for customers
See a complete list of office locations here

Open Your Account Online

Vanguard, Fidelity and Charles Schwab all make it easy to open an account. You can either do this online or in-person at a Fidelity or Schwab office. (Remember, Vanguard doesn’t have offices for customers.)

You’ll just need some basic info whether you get started online or at an office:

Driver’s license or other photo ID
Social Security number
Bank routing number and checking or savings account number
Employer’s name and address
Name, address and Social Security number of plan beneficiary, if applicable

Fund Your Account

Once your Roth IRA account is set up, it’s time to fund it using the bank account you linked to your new brokerage account. This process may take a day or two to complete.

There are two approaches you can take to funding your account:

Do it all at once. If you have $6,000 available, you can fund your Roth IRA fully in one shot ($7,000 if you’re over 50).
Make contributions every pay period or every month. The best way to do this is to automate your contributions so they come directly out of your paycheck.

There is one pitfall we should note. Many first-time investors make a common error when they open a Roth IRA account: They leave their funds in a temporary settlement account without actually taking the additional step of investing the money!

In that case, their money just sits there earning paltry interest in the settlement fund. They miss out on the chance to earn (potentially) bigger bucks in the stock market.

Select Your Investments

Money expert Clark Howard likes for you to keep the Roth IRA simple. That’s why he recommends target-date retirement funds.

With target-date retirement funds, you select the fund with the year closest to when you want to retire and simply put all your money into it.

Let’s say that’s 2050. You just buy a 2050 fund and then the fund manager automatically adjusts the stocks-to-bonds ratio of your fund as you age. No mess, no fuss on your part.

It’s that easy!

Here are some target-date retirement funds that Clark likes:

Vanguard Target Retirement Funds