How to Open a Roth IRA: Grow Your Retirement Savings

Opening a Roth IRA allows you to leverage this tax-advantaged plan and invest in your retirement. This individual retirement account is renowned for its ability to grow your contributions tax-free, assuming you fulfill the necessary conditions.

In this article, we’ll teach you exactly what a Roth IRA is, what its benefits, drawbacks, and limitations are, and who can open it. Also, we’ll show you how to open your Roth IRA account step by step to grow your retirement savings.

Key Takeaways

• A Roth IRA is a tax-advantaged individual retirement account to which you contribute after-tax earnings, but don’t pay taxes when making qualifying withdrawals.
• To open a Roth IRA, select a provider that suits your needs, gather the required documentation, fund your account, and choose where to invest based on your goals and risk tolerance.
• The earnings in your Roth IRA are tax-free if you don’t withdraw them before you're 59-and-a-half years old and your account is at least five years old.
• There are no required minimum distributions with a Roth IRA, but there are contribution limits and income restrictions based on your MAGI.

What Is a Roth IRA?

A Roth IRA is a type of individual retirement account created by former Delaware Senator William V. Roth. It’s a tax-advantaged account to which you contribute after-tax dollars, and your investments continue to grow and can be withdrawn tax-free.

The ability to grow your money tax-free is one of the main advantages of Roth IRA. This is also the key difference compared to traditional IRAs, where you have to pay income tax when withdrawing money in your retirement.

As a result, a Roth IRA account is a flexible option that gives you the full benefit of compound growth. Everything that you invest in your account will keep generating additional earnings over time, increasing your retirement savings. You can withdraw it all tax-free, provided you do it after you’re 59-and-a-half years of age and your account is at least five years old.

You can also take out all of your contributions to your Roth IRA at any time for free. However, withdrawing any earnings before the right conditions are met will incur taxes, penalties, or both.

How to Open a Roth IRA: Step-by-Step Guide

To open a Roth IRA account and use its full potential, follow these steps:

#1. Choose a Roth IRA Provider

This is one of the most important steps, and it involves choosing the right Roth IRA provider. There are many options to choose from, since you can use various financial institutions that have been approved by the IRS. These include banks, credit unions, brokerage companies, and savings and loans associations.

Every provider is different, which is why it’s essential to choose the one that suits your needs and goals. For example, some Roth IRA providers give users more options for investing than others. On the other hand, every provider has a specific fee structure, where some encourage frequent trading, while others charge inactivity fees.

#2. Gather Required Documents

Once you pick a provider, you need to file your personal details. Some of the basic details that you’ll need to provide include your Social Security number, a government-issued ID (e.g., your driver’s license), your contact details, and your employment information, if you’re employed.

Following that, you will need your bank account information (account and routing numbers) if that’s how you plan to fund your Roth IRA. In addition to all that, it’s good practice to have the necessary information about your beneficiaries ready, including their names, addresses, and dates of birth.

#3. Open Your Account

Opening your account is straightforward after you’ve collected the necessary documentation, and it usually only takes around 10 minutes. Most providers allow you to open your account online.

The process is quick and simple, and involves filling out an application with the information you gathered in the previous step. Once you do that, you will gain access to your dashboard, where you can set preferences, view investment options, and more.

Once your account is open, you’ll receive two documents from your provider:

1. IRA disclosure statement
2. IRA adoption agreement and plan document

These serve to establish a formal agreement between you and the provider and to explain all the rules and regulations relevant to a Roth IRA.

#4. Make Your Contributions

As we previously mentioned, contributions to a Roth IRA are made with after-tax dollars. The funding can go through your bank account, your paycheck (if your employer allows after-tax transfers), or through eligible rollover contributions from another retirement account.

You can make a lump-sum contribution, make smaller contributions periodically, or set up an automated system. Keep in mind that there’s a limit on how much you can contribute to your Roth IRA in a year. In 2025, the maximum you can contribute is $7,000 for account holders under the age of 50, and $8,000 if you’re age 50 or older.

#5. Select Your Investments

Your Roth IRA is just an account and not an investment itself. As such, you need to choose where you want to invest if you want your money to grow. A Roth IRA offers a wide range of investment options, but it also comes with clear limitations on what you can and can’t include in your account.

The table below lists investment options for a Roth IRA:

#6. Monitor and Adjust Your Portfolio

A Roth IRA is meant to be used for decades of compound growth, which means you should regularly review and adjust your investments. It’s good practice to review your portfolio annually or after every major life event (e.g., marriage or promotion). As your circumstances change, so may your goals, strategies, and risk tolerance.

Who Is Eligible to Open a Roth IRA?

The eligibility to open a Roth IRA depends on your type of income and the amount. You can only deposit earned income to your Roth IRA, and your modified adjusted gross income (MAGI) must not exceed a certain threshold set by the IRS. The exact figures change, as the IRS periodically adjusts them.

Here are the details regarding your ability to contribute to your Roth IRA in 2025 based on your filing status and MAGI:

• Single, head of household can contribute a full amount if their MAGI is up to $150,000. The amount gets phased out until $165,000.

• Married, filing separately, have a much lower income limit that gets phased out between $0 and $10,000.

• Married, filing jointly, or qualifying widow(er) can contribute a full amount if their MAGI is up to $236,000. The amount gets phased out until $246,000.

If your income exceeds the threshold, you’re not allowed to contribute to your Roth IRA.

Also, parents are allowed to open a Roth IRA for a child, since there is no age limit. However, the child has to have earned income, and they will have a custodial account controlled by an adult until they reach the age of majority.

It also doesn’t matter whether you’re an independent contractor or an employee, as you can open and contribute to a Roth IRA as long as you have earned income.

5 Benefits of a Roth IRA

There are multiple Roth IRA benefits that, in some cases, make it much better than other retirement accounts. Here are the biggest ones:

• Tax-free withdrawals. As long as you fulfill the criteria (having your account for at least five years and using the funds for retirement), you can withdraw as much as you want without paying any tax on it.

• Tax-free growth. Depending on how early you start investing and what you invest in, you can make significant gains over the years. All these earnings also become tax-free (e.g., no capital gains tax), regardless of the amount. This is unlike a traditional IRA, where you pay taxes on withdrawals.

• Flexible access to your contributions. Even if you don’t fulfill the criteria for withdrawing earnings from your Roth IRA, you can still withdraw anything that you’ve contributed tax and penalty-free. The account operates on a first-in, first-out (FIFO) basis, so you’ll always withdraw what you contributed first.

• No required minimum distributions (RMDs). Other retirement savings accounts, like a traditional IRA, require you to take distributions at a certain age. A Roth IRA doesn’t have that requirement, giving you the flexibility to let your money grow for as long as you want.

• Tax-free inheritance. The beneficiaries you name can inherit your Roth IRA. They will also be able to withdraw the funds without paying taxes on them.

Roth IRA Limitations and Rules

Before you decide to open a Roth IRA, you need to familiarize yourself with its limitations, and not just its benefits.

Here are the essential Roth IRA rules and potential drawbacks you need to be aware of:

• Contribution limits. The IRS sets specific limits on how much you can contribute to your IRA annually. In 2025, this limit is $7,000 for people under the age of 50, and $8,000 for those over that. Keep in mind that this limit represents total contributions you can make to all IRA accounts, regardless of how many you have.

• Income restrictions. You can only make contributions to your Roth IRA if your modified adjusted gross income (not to be confused with regular gross income) is below a certain threshold. As a result, if you’re a high earner, you may not be able to use this individual retirement account at all.

• No tax deductions. You can’t use contributions to your Roth IRA as tax deductions. This is unlike a traditional IRA, where your contributions are tax-deductible.

• Five-year rule. In addition to having to be at least 59-and-a-half years of age (or either disabled or using funds for a first-time home purchase with a limit of up to $10,000 in a lifetime) to withdraw earnings from your account without taxes and penalties, your account must also be open for at least five years.

Final Thoughts

Now that you have learned how to open a Roth IRA, you can leverage this tax-advantaged plan to build a secure retirement. The potential for significant growth through investments without taxes getting in the way makes this an enticing option for people who expect their marginal tax rate to be higher when they retire.

Make sure to choose an investment strategy that aligns with your risk tolerance and long-term goals. That’s the best way to make a Roth IRA work for you and grow your money while you sleep. Lastly, remember to start as soon as possible to take full advantage of compound interest. You can always withdraw your original contributions without taxes and penalties.

How to Open Roth IRA FAQ

#1. Is a Roth IRA better than a 401(k)?

A Roth IRA isn’t inherently better or worse than a 401(k), as these two types of plans offer different features. A 401(k) allows employees to have employers match their contributions, resulting in free money. However, a Roth IRA gives flexibility when investing and allows for tax-free retirement withdrawals.

#2. Is 25 too late for a Roth IRA?

No, 25 is not too late for a Roth IRA. It’s never too late to start saving. It’s always better to start as early as possible to take full advantage of compound interest, and 25 is an excellent age to open a Roth IRA.

#3. What is the 4% rule for a Roth IRA?

The 4% rule for a Roth IRA is a general guideline for retirees, suggesting they withdraw 4% of their account in the first year. This number should be adjusted for inflation for each subsequent withdrawal, ensuring retirees can sustain their lifestyle for about 30 years.

#4. Can I contribute to both a Roth IRA and a 401(k)?

Yes, you can contribute to both a Roth IRA and a 401(k), as long as you meet the income eligibility for a Roth IRA. The two accounts are completely unrelated, with their own contribution limits.

#5. Are Roth IRA contributions tax-deductible?

No, Roth IRA contributions aren’t tax-deductible, since they are made with after-tax money. The main advantage of this type of account is that you won’t be taxed on the money you withdraw from it after retiring.