Why Start a Roth IRA?

A Roth IRA is a great way to supplement your 401(k) or other workplace retirement plan. Fun fact: 8 out of 10 millionaires invested in their company’s 401(k) according to our National Study of Millionaires. That means their boring old workplace retirement account played a huge part in their financial success! On top of that, 3 out of 4 millionaires invested outside of their company plans too.But if you don’t have a retirement plan at work—and lots of people don’t—a Roth IRA isn’t just a nice thing to have. It’s essential. 

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With a Roth IRA, you won’t pay any taxes on the money you take out in retirement once you hit age 59 1/2. That’s because you invest in a Roth IRA with after-tax money—meaning you’ve already paid taxes on it.

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Minimum deposit and balance Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguard account, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enrollFees Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you opt into paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% in advisory fees (after 90 days)Investment vehicles Robo-advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading Other: Vanguard 529 Plan See our methodology, terms apply.

ProsNo commission fees for stock and ETF tradesNo transaction fees for over 3,000 mutual fundsOne of the largest ETF and mutual fund offerings aroundRobo-advisor Vanguard Digital Advisor® available for 90-day free trial with no advisory feesVanguard 529 Plan helps you save for college early onExcellent customer serviceOffers retirement planning toolsCustomers get access to GetHuman, a website dedicated to human-to-human customer service, with features that include talking to a Vanguard rep, notice of the current hold time, reminders to call when call center opens, as well as pro tips and talking points for customersVanguard Personal Advisor Services® available for personalized supportConsMany retirement funds require $1,000 to invest$20 annual service fee for IRAs and brokerage accounts (investors can waive this fee by opting into paperless statements)Robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enroll and charges up to 0.20% in advisory fees (after 90 days)Basic trading platform onlyNo robust research and data toolsLearn MoreView More


Step 3: Open your IRA account

Opening your account is usually pretty simple, and often, can be done online or easily through your brokerage. However, the exact process will vary.

“How you open an account will depend on your selected IRA provider or advisor,” Welsh says. “If you take the do-it-yourself approach, you can likely do it online. If you work with a bank or advisor, you will be provided with forms to open the account, either electronically or in hard copy depending on their processes and your preferences.”

Typically, you’ll be asked for the following documentation and information:

  • A copy of your government-issued ID, such as a driver’s license or passport
  • Your personal information, including your name, phone number, address, date of birth, and Social Security number
  • Details on your beneficiaries, or who you’d like to inherit the account when you die
  • Your preferred contribution method
  • Banking information (if you want to fund the account with an electronic transfer) or information on your other 401(k) or IRAs (if you’re doing a rollover)

If you opt to roll funds over from a 401(k) or another retirement, you’ll also have some forms to fill out there. Some will send the money directly to your new IRA account. Others may send you a check, which you’ll then need to deposit into the new IRA yourself. Typically, the whole process takes anywhere from two to four weeks.

If you rollover funds to a traditional IRA, you won’t need to pay taxes on the funds (until you start making withdrawals). If you roll over funds to a Roth IRA, though, you’ll owe taxes on the rolled-over amount when you file your annual returns. 

How to Start Investing in an IRA

2. Fund your account

Now it’s time to put the minimum amount in to fund your brand new account. As previously mentioned, different brokerages have different minimum requirements, so 

3. Select your investment strategy

Your next step is building a system that will allow you to seamlessly build wealth over time. This means figuring out how much you can afford to invest in an IRA each month, but it also means choosing investments that will exist within your IRA.

Remember: Your IRA is nothing more than a retirement vehicle you can use to save and invest for the future. Once you open an IRA, you still have to choose the investments that do the work inside your account.

If you find you are able to deduct contributions to a traditional IRA because your employer doesn’t offer a retirement plan, you should strive to contribute as much as you can each month up to the $500 monthly (and $6,000 annual) limit. That way, you’re building up retirement funds in a hurry while maximizing tax advantages. If you opt for a Roth IRA instead, you won’t get any tax advantages now, but you will later on since you won’t have to pay income taxes on distributions once you reach retirement age. Either way, the ultimate goal is striving to invest as much as you can each month up to account limits, and without harming your other financial goals. 

In terms of selecting your portfolio, this component of your system depends a lot on which investment platform (brokerage firm) you choose to go with. Some firms like M1 Finance let you set up “pies” of investments that are based on fractional shares. With M1 Finance, you can build your own “pie” from more than 6,000 available stocks and funds, but you can also choose from “Expert Pies” that have been put together by in-house investment professionals.

That’s just one way this can work, but there

That’s just one way this can work, but there are plenty of other ways to set up a portfolio depending on the firm you choose. For example, let’s imagine you decide to open an IRA with Betterment.

Betterment is a robo-advisor that helps you formulate an investment plan based on your age, your investing goals, and your risk tolerance. As a result, opening an IRA with Betterment is a breeze. You’ll start by answering some basic questions about yourself, including your age, your income, and when you plan to retire. From there, Betterment will suggest a specific investment plan that is formulated to help you achieve your goals.

If you’re a knowledgeable investor who wants

If you’re a knowledgeable investor who wants to select the stocks, bonds, ETFs, and other investments that live within your IRA, that’s perfectly okay, too. Just remember that some brokerage firms will help create an investing plan for you based on how much you can invest and your long-term goals.

4. Make it automatic

To help in your effort to contribute consistently, and to remove some of the pressure, consider making your investments automatic with the click of a button. Many of the top brokerage firms let you set up automatic investments through their mobile apps or online platforms, including Betterment’s example below.

5. Check in regularly and stay on track

5. Check in regularly and stay on track

Part of the fun of putting away money for your future is watching it grow. Keep an eye on your portfolio to make sure you’re contributing the way you want to. It can be tempting during tighter financial times to stop contributing, but you can always reduce your contribution amount depending on your circumstances and then change it back later. Don’t worry about small fluctuations and seek help from an advisor if necessary. 

Can I Open a Roth IRA for My Child?

You can open a Roth IRA for your child. In order to do so, you’ll need to set it up as a custodial account, which is an account controlled by someone over 18 for a minor.

3. Fill out the Paperwork

Most banks and brokerages have webpages for Roth IRAs that you can visit to begin the process. You may be able to complete the entire application online, or you can speak to someone in customer service if you have questions.

You’ll need the following:

  • A driver’s license or another form of photo identification
  • Your Social Security number (SSN)
  • Your bank’s routing number and your checking or savings account number so that you can transfer money directly to your new account
  • The name and address of your employer
  • The name, address, and SSN of your plan beneficiary (the person who will get the money in the account if you die)

Naming one or more beneficiaries is very important. It allows the account to pass to someone else without having to go through probate. Remember to keep your beneficiary designation up to date, especially after events like marriage, divorce, or the death of a beneficiary.

As part of the application, you will have to fill out a 5305-R form for the Internal Revenue Service (IRS).

View important information about our fees and commissions

View important information about our fees and commissions

3. Standard online $0 commission does not apply to over-the-counter (OTC) equities, transaction-fee mutual funds, futures, fixed-income investments, or trades placed directly on a foreign exchange or in the Canadian market. Options trades will be subject to the standard $0.65 per-contract fee. Service charges apply for trades placed through a broker ($25) or by automated phone ($5). Exchange process, ADR, and Stock Borrow fees still apply. See the Charles Schwab Pricing Guide for Individual Investors for full fee and commission schedules. Employee equity compensation transactions are subject to separate commission schedules.

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.

Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affiliated with Charles Schwab & Co., Inc. This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager. Depending on the type of account you have, there are different rules for withdrawals, penalties, and distributions. Please understand these before opening your account.

6. Choose mutual funds with strong returns

When you’re choosing your mutual funds, look for funds with a long track record—10 years or more—of strong returns that consistently outperform the S&P 500. They’re out there! You’ll also want to spread your investments evenly across these four types of funds:

  • Growth and Income: These funds create a stable foundation for your portfolio by investing in big American companies that have been around for decades. They also pay dividends. (Dividends are payments companies make to their stockholders to share their profits.) You might find these funds listed under large-cap or blue chip funds.  
  • Growth: These funds are made up of medium or large U.S. companies that are up and coming. Sometimes called mid-cap or equity funds, they’re more likely to ebb and flow with the economy.  
  • Aggressive Growth: Meet the wild child of your portfolio. When these funds are up, they’re really up, and when they’re down, they’re really down. Aggressive growth funds normally invest in smaller companies that have tons of potential.  
  • International: Investing in international funds gives you a chance to invest in big non-U.S. companies you already know and love—like Nestlé, which is based in Switzerland. International funds spread your risk beyond U.S. soil. Just don’t confuse them with global funds, which bundle U.S. and foreign stocks together.

When should I contribute to an IRA?

The earlier the better. With investing, time is your greatest asset. That means the sooner you start saving the longer it can grow. If you invest $10,000 and generate the average 7 percent, inflation-adjusted market return, it would be worth $19,000 after 10 years, $54,000 in 25 years, $149,000 in 40 years. Keep in mind the market may return more, or even yield negative returns, in a given year. But over long periods of time, as you can see, time in the market has a pretty big impact on growth.

Again, if you haven’t started saving for retirement don’t worry. It’s never too late to start.

Get that match. If you have a 401(k), you can still contribute the maximum allowed to an IRA, Roth IRA (within income restrictions) or combination of both. Here’s the thing, some employers offer matching contributions in their 401(k) plans. If your employer matches contributions, dollar-for-dollar, up to 6 percent of your salary, make sure you’re contributing at least 6 percent from each paycheck first. It’s free money, so don’t leave that on the table!

Once you’ve at least hit your match, you can keep funneling up to $19,000 annually into a 401(k) per current IRS rules, or you can divert funds above and beyond your employer match into your Roth IRA or traditional IRA – whichever works best for your plan. And if you’re at a point where you’ve maxed out your 401(k), an IRA is a great way to capitalize on additional tax-advantaged retirement savings, depending on your income and tax filing status.

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:

  1. 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.
  2. 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.

3. Opening and Funding Your IRA

Once you choose which IRA provider you want to work with, go to the company’s website to start the application process. Some companies may offer branch access, but online services can often be easier to initiate transfers through. These applications will ask for certain personal information, like your full name, address, Social Security number, email and more.

If you’re transferring funds from your own savings or checking account, you’ll need to provide your bank’s routing number and your account number. But if you’re funding your account through a 401(k) rollover, you’ll instead need to list your company’s name and address, as well as the manager of your 401(k). You can also transfer money from another IRA, in which case the provider will ask for that account’s information.

Remember that the IRS limits how much you can contribute to an IRA. For 2022, the IRA contribution limit is $6,000, and the catch-up contribution limit for those 50 or older is $7,000. Note that 401(k) rollovers do not count against these limits.

Why Should You Invest in an IRA?

A traditional IRA offers big advantages over a brokerage account, thanks to special tax treatment.

In a brokerage account, the capital gains you realize when you sell at a profit and dividends earned by your investments are taxable based on your current income levels.

With a traditional IRA, you experience none of these tax consequences. Instead, you only pay regular income taxes on withdrawals from the IRA. This huge advantage helps your retirement funds grow much faster over time.

Can I switch my IRA?

Don’t like your IRA provider? It’s easy to switch your IRA, and you can do so for any reason and at virtually any time. It’s best to transfer your IRA directly from one broker to another.

The steps to transfer your IRA are straightforward:

  1. Open a new IRA account, which will receive the transfer of your current IRA.
  2. Contact your new provider about a transfer. You may be able to transfer your IRA online without any human help, but a customer representative can also help you, if needed.
  3. Complete the transfer forms, typically online or on paper. You’ll need to provide details such as the old provider and account number. If you have investments in your old IRA, your old provider will likely charge you a fee to move them to the new account.

A few days later, securities and cash in your old account will appear in your new account.

You need to be careful when transferring an IRA, because you could create additional taxes if you switch IRA types between a traditional IRA and a Roth IRA. In general, you want to keep the same kind of account. That is, you’ll want to transfer funds from a traditional IRA to another or from a Roth IRA to another, rather than from a traditional IRA to a Roth IRA or vice versa.

If you’re changing account types, it could create significant tax liabilities, and you need to be fully informed about those before making any transfers.

Account Opening and Funding Questions

Account Opening and Funding Questions  

What if I have accounts elsewhere?

Consolidating all your accounts at Schwab may help you better manage your finances. We can help you every step of the way in bringing your assets over, in a tax-efficient manner. Click here to learn more.

What do I need to open a Traditional IRA account?
  • Social security number(s)
  • Driver’s license
  • Employer’s name and address (if applicable)
  • Statement information for any assets or cash you’d like to transfer
  • Beneficiary information
How do I open an IRA account?

The easiest way to open Schwab IRA account is online. You can also get help opening an account by calling us at 866-855-5635 or visiting one of 300 local branches.

The online account application process only takes about 10 minutes. Key steps include:

  • Choosing the type of IRA account
  • Providing your personal, employment, and financial information
  • Selecting specific account features
  • Creating login credentials and providing contact information for your account
  • Verifying your identity
  • Indicating how you’ll fund the account
How do I fund my account?

There are multiple ways to fund your new Schwab account:

  • Electronic funds transfer (EFT) with Schwab MoneyLink® to transfer funds or assets from an external account. You may also continually fund your account by setting up auto deposit to transfer funds from your checking account.
  • Wire transfer request from another financial institution.
  • Check deposit by mail or in person at your local Schwab branch.

Full funding instructions and access to online fund transfer tools will be provided after your account is opened.

What are the 3 most common types of IRAs?

  • Traditional IRA: A traditional IRA allows you to make pretax contributions, which can lower your tax bill today. Withdrawals made during retirement will be taxed, however, making this a good choice if you think your tax rate will fall in the future.
  • Roth IRA: In a Roth IRA, contributions are made with after-tax dollars, meaning you’ll get no tax benefit today. But during retirement, all withdrawals are tax free and you won’t be required to take minimum distributions either, as you are with a traditional IRA.
  • Rollover IRA: A rollover IRA is what happens when you convert a 401(k) plan from a previous employer into an IRA. You’ll have significantly more investment options with an IRA than you would with an employer’s plan.


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