Do you want to know where to open a Roth IRA? Are you curious why you should be using a Roth IRA?
When I started talking more about Roth IRAs on my personal finance YouTube channel, my subscribers had many questions. Those questions ranged from
- why should you open a Roth IRA?
- where you should open a Roth IRA?
- what are the benefits of a Roth IRA?
- why choose the Roth IRA over other accounts?
I received all those questions and more. Some wanted to understand why they should have this account and others wanted to know how to open one.
I recently started maxing out my Roth IRA contribution each year in order to grow my tax free retirement accounts. My goal is to reach over a million dollars in my Roth IRA.
I love my Roth IRA and all of the benefits it offers. If eligible I think everyone should start one for retirement savings. It’s the number one thing people should do after they’ve maxed out employer match benefits from a 401k.
And if you don’t have access to a 401k at all? Then you should start a Roth IRA today. I started mine years ago when I was earning income but did not have access to a 401k. Over time the account has built up and I’m on track for a comfortable retirement.
Why Open A Roth IRA
Roth IRAs are amazing because they allow you to create tax free growth with your money.
Yep, tax free growth!
You can do this because when you invest in a Roth IRA you are using post tax income. You fund your account with money that has already been taxed. Then you let that money grow tax free inside your Roth IRA and withdraw the money tax free.
It’s truly a miraculous type of account.
This account type is compared to a traditional IRA where the money you deposit today is tax deductible now. With that account the earnings grow tax free but then you have to pay taxes when you withdraw the money.
Personally the Roth IRA has made a lot of sense for our situation. We are already investing in 401ks which will be taxed later during withdrawals, so also having some money growing for the future that won’t be taxed will be very helpful when it is time to live off of our investments.
Roth IRA accounts have a couple other awesome benefits:
- You can withdraw the money you saved later without a penalty. However, you can’t withdraw any earnings on your money without penalty but the actual money you put into the account can be take out later if needed as long as you wait 5 years.
- You also have an option to withdraw money for special life events like buying a home. This can lower the amount your money compounds over time but it’s very helpful for many who need the money in the moment.
With so many amazing benefits to the Roth IRA, what is the catch?
There are limits to how much money you can put in a Roth IRA.
For 2020 and 2021 that number is $6,000. To qualify for a Roth IRA you have to have an earned income in order to contribute.
Roth IRAs are great vehicles to stash away money for your future. And while it might seem complicated there are only three steps to getting started:
- Open your Roth IRA at a financial institution
- Contribute money to your Roth IRA
- Choose the investments that money buys inside your Roth IRA
How To Choose A Financial Institution
Once you’ve decided to open a Roth IRA you need to figure out where to open one. After picking an institution you then learn how to go through the process.
This can be overwhelming because almost every financial institution offers Roth IRAs now from banks and credit unions to investment platforms to mutual fund companies. You have hundreds of options for where to open a Roth IRA.
My favorite options for a Roth IRA are online brokerages that are low cost and easy to manage on your own. These accounts are easy to manage either through your own choices or a robo-advisor. Some people prefer managed accounts, but I think you and I are smart enough to do it on your own. You can make good choices and consistent contributions on our own, so that’s what I’ll talk about here.
I also like online brokerages for Roth IRA accounts because they save you money. You won’t be paying those hefty management fees or commissions with the free trades and lower account minimums.
Online brokerages are also easier to access for more people. Some of these accounts allow you to start with just $1 which makes investing much easier to start and more accessible for everyone.
Where To Open Roth IRA Accounts
There are literally thousands of places to open up roth IRA accounts so I’m just going to cover a few of my favorites that offer the best value and experience.
Some of these are affiliate links which means I will make a commission if you sign up but not all of them are.
First, the newer platform I love:
M1 Finance is my current favorite for Roth IRA accounts because it gives you the best of a robo-advisor combined with the control of a traditional brokerage which means you have more options for what to include in your Roth IRA.
You can watch the M1 Finance Review video above or read the full review about M1 Finance. I’ve used M1 Finance as a brokerage for over a year and love the app which makes me recommend it highly to anyone wanting to start a Roth IRA.
It also charges zero commissions or management fees and the starting balance for brokerage accounts is $100 and retirement accounts just $500.
Next, the traditional brokerages I’ve used and recommend often:
Fidelity is a great platform for opening a Roth IRA and a huge provider of mutual funds. Many people already have 401ks with Fidelty and for that reason it can make a lot of sense to use them also for a Roth IRA since they offer lost cost options and an easy to use platform. It’s also very beginner friendly. There are benefits to having all your accounts in one place to make it easier to see at a glance how you are doing.
I personally have my Roth IRA with Vanguard and love it for the low cost, set it and forget it funds. I also love that they don’t spend money on things that don’t matter like advertising so they keep expenses low on funds and don’t charge commissions.
However, until the last couple years they haven’t been the most user friendly platform. I recommend them and use them personally but the reason why is because their funds have very, very low expense ratios so if you can buy Vanguard funds on any platform they are usually a great option. They have been getting better over the last few years which I appreciate and they also offer a ton of educational tools.
Other options for Roth IRAs:
There are a ton of other good ones in this realm like Charles Scwab and TD Ameritrade, but I just don’t personally have much experience with them. When looking for a place to open your Roth IRA you should always look at reviews of the company.
How To Choose Your Retirement Investments
Opening an account is not the final step of your Roth IRA. Next you’ll have to contribute money and then you’ll have to choose your investments.
You Must CHOOSE Investments
A Roth IRA is just a type of account that is protected from taxes. You have to fill it with money and then buy specific investments with that money.
If you don’t choose an investment and buy it inside your Roth account then your money may end up just sitting in cash and not earning any interest. (It’s not a common mistake but I’ve sadly seen it happen to people!)
If you chose a robo-advisor based platform then you will simply choose a style of investing like how aggressive or conservative you want to be. The robo advisor automates what you invest in.
Creating Your Own Portfolio
If you choose a traditional online brokerage then you will get to select what you want inside your Roth IRA in order to create a portfolio. Generally this will be a mix of stocks and bonds to create a balanced and diversified portfolio.
A lot of people can get super stuck here because there are thousands or options for your portfolio. It can feel overwhelming but don’t let it stop you.
You can start with a portfolio created by experts or a general total stock index fund and then do more research on stocks and funds so you can make different choices or rebalance as you go.
Learn About Investment Types
Many platforms offer educational content about what to choose inside your Roth IRA and many also offer meetings with investment advisors if you really do feel too overwhelmed. The point here is to do your own research but don’t fall into inaction – get started and invest consistently.
Getting Started With Your Roth IRA
There really is no better time to get started with a Roth IRA than right now. The earlier you start investing for retirement the better off your life will be. You can budget investing in your Roth IRA in your budget every month in order to max out your account.
Remember that there are income limits on who is eligible for contributing to Roth IRAs, so double check the current year’s guidelines to see if you qualify for one of these amazing retirement investing tools.
Also double check to see what the contribution limit is for the current year. Each year there is a max amount you can invest in a Roth IRA. When I first started investing in my Roth IRA you could only contribute $4,000 per year and now in 2020 when I’m writing this post you can now contribute $6,000 per year.
Remember that maxing a Roth IRA is no different than any other financial goal you may have. You need to set the goal, write it down, and then work toward achieving it. This likely means consistent contributions each time you get paid.
How To Track Your Roth IRA Contributions
There are a couple different ways to track your Roth IRA contributions. I highly recommend you keep track of the money that you contribute over the year. Doing so will help you maximize this account.
First, you can track contributions within your Roth IRA at most brokerages. Some offer cool features to help you stay on track and get motivated.
Some of these show your percentage to 100% for the year. Others just keep a tally of your contributions to compare against that year’s maximum amount. Either way, almost every account will offer some form of internal tracking feature so you can see how much you’ve contributed for the year and how much you have left to go.
Secondly, you can use an app like Personal Capital to track your Roth IRA contributions for the year along with your whole financial picture.
I love being able to quickly see my overall financial picture in one clean dashboard. I have many accounts in various places but Personal Capital pulls it all together.
Personal Capital makes it quick to see everything at a glance and check your progress.
These visual trackers give you an old school method of tracking. This can be motivating for keeping you on track to max out this investment account. I highly recommend you keep a visual tracker of some sort in a place where you can see it often.
Mary is the founder of Pennies Not Perfection where she shares her journey to build wealth through online income. She quit her day job in 2021 after she paid off her debt and doubled her 9-5 salary.
Mary's favorite free financial tool is Personal Capital. She uses their free tools to track net worth and work toward to financial freedom.