A Roth IRA is a popular tax-advantaged retirement account that allows you to grow your investments for retirement, and make withdrawals on earnings tax-free after certain conditions have been met. The Roth IRA was named for its chief sponsor, the late Senator William V. Roth Jr, from Delaware.
These retirement accounts are more flexible that a 401k, and you can withdrawal funds in the even of an emergency. You can also access your funds to purchase your first home, as well as save for your children’s college education.
If you have been wondering how to open a Roth IRA you may be surprised to find out it is easier than you think. If you choose to open a Roth IRA at an online brokerage such as industry leader ETrade, it is even easier as all transaction can be done at a low cost, from your home or office computer.
How To Open A Roth IRA: Investment Priorities
Generally, a Roth IRA is a better investment than a 401k due to the fact that withdrawals are made tax-free. A Roth IRA allows you to pay your current income tax rate in exchange for tax-free withdrawals making these excellent retirement investment vehicles for young investors at the start of their career.
A Roth IRA can be an excellent investment later in life as well, especially if you would like to leave the Roth account as an inheritance, as your beneficiaries will enjoy tax-free withdrawals on the funds as well.
If your employer offers matching funds for your 401k account, it is usually a good idea to contribute to your 401k up until the employer match, and then contribute to your Roth IRA. Various factors can contribute to what will work best for you including risk-tolerance, investment objectives, and time frame for investing.
How To Open A Roth IRA: Asset Allocation
What you chose to invest in will depend on the above mentioned factors, as well as your age at the time of investing. If you are younger your portfolio can handle a larger percentage in stocks versus bonds. Online brokerages such as ETrade and Zecco offer specialized tools and service to screen for the stocks and bonds that best fit your criteria for investing.
You must also decide whether you are saving for a new house, education expenses, or retirement. Where you place your investment capital will be influenced by your goals. You may be willing to take on more risk in a fund earmarked for a new car, versus funds set aside for your children’s education.
A Roth IRA allows you to invest across a broad range of asset classes including stocks and bonds, CDs, real estate and other qualified investments. The ability to diversify in a Roth IRA allows for a better chance of realizing gains.
Mutual funds are excellent investments if you have little experience in investing, or do not want to commit the same amount of time to your portfolio that is required when picking individual stocks. Mutual funds often have low investment minimums, and may can be opened with only a few hundred dollars.
How To Open A Roth IRA: Saving Money
It is important to set a budget for investing and stick to it. The best strategy for saving varies from investor to investor, but many people find success with automatic withdrawals from checking accounts.