Saving up for retirement can help you have more financial security when you are older.
There are so many different types of retirement accounts, and a Roth IRA is just one of them. In addition, there are great tax benefits to having one.
Setting up a Roth IRA with these five steps is relatively easy.
Who Can Open a Roth IRA?
The first step to setting up is to determine if you are eligible to open this type of account.
Not everyone is eligible because of the taxing nature of this account.
If you are under the age of 70 1/2 and have an earned income, you are generally eligible to set up a Roth IRA.
You must earn an income to contribute to it, but your income cannot exceed $144,000 (for 2022). In 2023, this is being raised to $153,000. This income cap is doubled for couples. Be sure you know if you are eligible to set up a Roth IRA before opening an account.
How much money do you need for a Roth IRA?
Once you’ve determined if you are eligible to open one, the second is to determine how much money you need to open an account.
When it comes to how much money you need, there is no set amount, and almost anyone can open an account today. Typically, you need to have at least $1,000 saved to open one However, some financial institutions can have lower minimums and allow you to open a Roth IRA with just $1.
It’s important to check the financial institution you are considering to know the exact amount you need to open an account. You may not have $1,000 to open the account today, but you may have $500, so find an institution that will work for you.
How much should I put in my Roth IRA monthly?
Once you’ve opened your Roth IRA and contributed the minimum amount for your specific institution, your next step is to decide how much you will contribute to this account each month.
There is a contribution limit each year. For 2022, this limit was $6,000 for the total year; if you are older than 50, that limit is $7,000. 2023 limits will be increased to $6,500. Limits are doubled if you are a married couple.
Aim to contribute enough each money to hit this limit. This comes out to $500 a month towards your investment. Make this your goal, but if you aren’t able to contribute the $6,000 each year, you can still make a smaller monthly contribution towards yours.
Where Can I Open a Roth IRA?
Before you can start one, you need to find a financial institution that offers these accounts.
This is a crucial step to setting up an account, because you actually need to put money in this account and choose your investments. Most major banks and investment firms offer them, so it’s important to do your research to compare fees and other features before you decide on a specific institution.
You may want to look for a Roth IRA that has a lower minimum amount to open the account.
When should I start contributing?
The final step of to set up a Roth IRA is to know when you can start contributing.
Each year you can contribute a certain amount that the IRS sets. For example, if you want to invest in 2022, open an account before 2023 because you can still contribute to this account until the end of the tax day.
Of course, you will want to start your contributions for the current year before the year ends, but if you are late to the game, you can play catch up to get that full amount in your Roth IRA. This is especially great if you can’t budget $500 a month to meet the full contribution limit.
Final Thoughts
Setting up a Roth IRA is a great way to save for retirement and take advantage of the tax benefits associated with the account.
By following these five steps, you can ensure that you’re setting up your Roth IRA correctly and taking full advantage of the available benefits.