How To Invest in a Roth IRA

Investing in a Roth IRA

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A Roth IRA is a type of individual retirement account (meaning it’s managed by the individual who owns the account) that comes with unique tax benefits because you contribute after-tax dollars and won’t pay any taxes on your earnings if you withdraw them under the right circumstances.

Learn how to invest in your Roth IRA so you can enjoy those tax-free earnings.

Key Takeaways

  • Roth IRAs can make it possible to save for retirement while enjoying tax benefits.
  • To grow your contributions, you need to select investments.
  • You can choose between limit, stop, and buy orders when you order investments for your Roth IRA.

Open a Roth IRA

The process of opening a Roth IRA is similar to opening a bank account, except you have to be eligible to open one. Your income will affect whether or not you qualify for a Roth IRA.

In 2022, the total annual contribution limit for all kinds of IRAs, including Roth IRAs, is $6,000 per person ($7,000 if you’re over 50 years of age). Depending on your income, you may be able to contribute fully, partially, or not at all toward that limit.

The following chart outlines who qualifies to contribute to a Roth IRA and how much.

If your filing status is... And your modified AGI is... Then you can contribute...
married filing jointly or qualifying widow(er) less than $204,000 up to the limit
married filing jointly or qualifying widow(er) greater than or equal to $204,000 but less than $214,000 a reduced amount
married filing jointly or qualifying widow(er) greater than or equal to $214,000 zero
married filing separately and you lived with your spouse at any time during the year less than $10,000 a reduced amount
married filing separately and you lived with your spouse at any time during the year
 
greater than or equal to $10,000 zero
single, head of household, or married filing separately and you did not live with your spouse at any time during the year less than $129,000 up to the limit
single, head of household, or married filing separately and you did not live with your spouse at any time during the year Greater than or equal to $129,000 but less than $144,000 a reduced amount
single, head of household, or married filing separately and you did not live with your spouse at any time during the year greater than or equal to $144,000 zero

If you qualify to open a Roth IRA, you’ll generally take the following steps to open this type of account.

  • Provide documentation and information to the brokerage: Expect to provide your Social Security and driver’s license numbers, your employer’s name and address, and documentation such as statement information for assets or cash you are transferring. Some custodians may also require you to choose a beneficiary.
  • Make your first deposit: Some brokerages will have an initial deposit requirement to meet, but even if there is no requirement, you may want to make your first deposit so you have funds in your account to invest.
  • Set up recurring deposits: To make saving for retirement a priority, you can choose to set up recurring deposits that come directly out of your paycheck or bank account on a recurring basis.
  • Choose your investments: While you can hire professionals to help you manage your Roth IRA, chances are you’ll be choosing your first set of investments to allocate your savings toward. 

If you earn too much to contribute to a Roth IRA, you can set up a traditional IRA and contribute to it, then convert your traditional IRA account into a Roth IRA. This process is known as a backdoor Roth.

Fund Your Roth IRA

You can contribute up to $6,000 ($7,000 if you're age 50 or older) to your Roth IRA. You should have plenty of options for how to fund your Roth IRA, but how you’re allowed to fund it may vary depending on the brokerage you’re working with.

You may be able to pay by electronic funds transfer (EFT), automatic direct deposits, wire transfer, or check.

Place a Trade To Invest Roth IRA Funds

When it comes time to choose an investment and place the trade to secure it, you’ll generally take the following steps.

Choose an investment

First, you’ll choose your investment. You can choose from a wide variety of investments, such as stocks, bonds, ETFs, mutual funds, and CDs.

Choose an order type

Use a market order to buy the investment immediately. Market orders guarantee your order will be executed. There are three types of market orders worth being aware of:

  • Limit order: Buy a security at a specific price or for a lower price than it’s currently listed at
  • Stop order: Buy or sell a stock only when the investment reaches a specified price
  • Buy stop order: Buy a security only after the price of the security reaches a specified stop price

Place the order

Once you choose the type of order you want to place, you can place the order during market hours. To confirm your order has been executed, you can usually log into your online account to confirm execution as well as to find out what the trade price was, what time the transaction occurred, and how many shares were bought or sold.

If you decide you want to sell an investment held in your Roth IRA, you can follow similar steps to sell instead of buy.

Investing in a Roth IRA

To take advantage of the tax-free growth that occurs with a Roth IRA, here’s a few helpful investing tips worth keeping in mind.

  • There’s no guarantees: It’s important to remember that investing results can vary, and what your Roth IRA's rate of return is will be based on your unique investment approach and ongoing market conditions.
  • There are some investment restrictions: Make sure you follow IRS rules on what you can and can’t invest in through your IRA, or you may face penalties or additional taxes.
  • Withdraw at the right time: To enjoy that tax-free growth, you need to wait until you’re 59½ or older, or if you have owned your account for at least five years to make withdrawals (some exceptions apply).
  • Diversify your investments: The more diverse your investments are, the more you spread out your risk.
  • Invest now: The sooner you can start investing in your Roth IRA, the better, as that will give you many years to grow your investments and to bounce back from market declines before you retire.
  • Use a robo-advisor: If you need help choosing investments but don’t want to hire an investment advisor, you can use a handy robo-advisor to help. A robo-advisor is an online tool that can give investment advice based on your unique financial needs and preferences (such as your risk level and your intended date of retirement).

The Bottom Line

Investing in a Roth IRA is an investment in your retirement and future. Consider factors such as fees and investment options available before zeroing in on the best Roth IRA for you. There are many different investment options and strategies available for Roth IRAs, so select one that aligns best with your financial goals.

Frequently Asked Questions (FAQs)

When can I withdraw from my Roth IRA?

You can withdraw anytime from a Roth IRA, but there may be some penalties.To avoid a potential 10% early withdrawal penalty, you should withdraw after the age of 59½ or once your Roth IRA account has been open for five years. You can withdraw early and avoid penalties if you are buying a home for the first time, have college expenses to pay for, or need to cover birth or adoption expenses.

What is the difference between a traditional IRA and a Roth IRA?

The main differences between Roth and traditional IRAs stems from their income limits and taxes. Unlike Roth IRAs, traditional IRAs don’t have income limits. And while Roth IRAs allow you to make contributions using post-tax income and to earn tax-free growth, with a traditional IRA you will use tax-free income to make contributions and will pay income taxes on withdrawals.

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