How to Get a Roth IRA?

Find out if a Roth IRA fits your finances and where to sign up.

Laura Adams, MBA
5-minute read
Episode #230


A caller from Maryland recently left a message on the Money Girl voice mail line. She said that many people have been touting the benefits of a Roth IRA and telling her that she should open one. But she’s confused about whether she’s eligible since her husband makes close to $200,000 per year.

Who Is Eligible for a Roth IRA?

A Roth IRA can be a great way to save for retirement. If you’re not sure what a Roth or a traditional IRA is, be sure to read What Is the Difference Between a Traditional and Roth IRA? on Money Girl’s Quick and Dirty Tips page.

The caller alluded to income restrictions on who can contribute to a Roth IRA. And she’s right about that. The first step to getting a Roth IRA is to make sure that you’re eligible to contribute to one. When your modified adjusted gross income or MAGI for the tax year is within a certain range, the total amount you can contribute to a Roth IRA is reduced or phased out. If your income exceeds the allowable range, you’re not allowed to make a Roth IRA contribution. However, if your income drops below the IRS’s allowable limit in the future, you can start making Roth contributions to the same account again.

Here are the Roth IRA income limits by tax filing status for 2011:

  • Single, Head of Household, or Married Filing Separately (if you did not live with your spouse during the year): The phase-out range is $107,000 to $122,000, which means that you can’t make a Roth IRA contribution if your MAGI is $122,000 or more.

  • Married Filing Jointly: The phase-out range is $169,000 to $179,000, which means that neither spouse can make a Roth IRA contribution if your MAGI as a couple is $179,000 or more.  

  • Married Filing Separately: If you did live with your spouse during the year there is no phase-out range, but you can’t make a Roth IRA contribution if your MAGI is $10,000 or more.

If the caller files taxes jointly with her husband, who earns close to $200,000 per year, then his income alone would probably make them ineligible to contribute to a Roth IRA. As I mentioned, the threshold for joint filers is $179,000 for 2011; however, she could invest in a traditional IRA instead.

To figure out your MAGI, you can use the worksheet in IRS Publication 590 or get help from a financial advisor or tax accountant.

What Are the Benefits of Having a Roth IRA?

If your account mushrooms in value over many years, all those earnings in a Roth IRA are never taxed, which saves you a bundle!

A Roth IRA comes with lots of benefits. Here are 5 major reasons why a Roth IRA might be a good choice for you:

1. Tax-free retirement income 
Contributions to a Roth IRA are made from post-tax income and are not subject to additional tax when you take withdrawals. If your account mushrooms in value over many years, all those earnings are never taxed, and that saves you a bundle! Though you don’t get a tax break in the current year (like you do with a traditional IRA), the long-term tax savings of a Roth could be much higher.

2. Penalty-free withdrawals
Since you pay tax upfront on contributions to a Roth IRA, you can also withdraw money at any time without penalty. However, withdrawing your earnings on the account before age 59½ typically triggers a 10% early withdrawal penalty. Though the purpose of an IRA is to save for retirement, having this flexibility means you could get to your money in a pinch.

3. No required minimum distributions (RMDs)
With a Roth IRA, the IRS doesn’t require you to take withdrawals during retirement, like with a traditional IRA. You can continue making contributions to a Roth during retirement or leave it to your heirs.

4. Reduced taxes
If you’re just starting your career, it’s likely that your income is lower now than it will be when you retire. If you believe that your tax bracket is lower today than it will be in the future, then taking a smaller tax hit on Roth IRA contributions in the current year can save you money in the long run.

5. No conflict with workplace accounts
You can participate in a retirement plan at work and contribute the maximum amount to a Roth IRA. For 2011, you can sock away up to $5,000 (or up to $6,000 if you’re age 50 or older). To learn more about contributing to both a workplace retirement plan and a traditional IRA, read Should You Contribute to Both a 401(k) and an IRA?

Where to Get a Roth IRA?

Signing up is easy. I recommend that you use an online mutual fund company or a brokerage firm. As you compare companies, consider these features:

  • types of investments available

  • account maintenance fees

  • trading fees

  • fund expense ratios

  • required minimum balances

  • personalized service from investment professionals

The beauty of an IRA is that you’re in control and can invest the money in just about anything. If you want to own individual stocks, check out brokerage firms like ETrade.com, Scottrade.com, and ShareBuilder.com. They also offer a full range of investments, like bonds, exchange-traded funds, and mutual funds. They typically don’t require a minimum balance to open up an IRA.

If you want to own mutual funds, consider popular low-cost fund families like Fidelity.com, Vanguard.com, and Schwab.com. These offer a wide range of their own branded mutual funds and exchange-traded funds in addition to stocks, bonds, and CDs. They typically require a minimum investment—like $1,000 or $2,500—but will waive it if you set up automatic monthly transfers to your IRA of $100 or $200.

Should You Invest in an IRA or 401(k)?

If you have a retirement plan at work—like a 401(k) or a 403(b) that offers matching funds—that’s where I recommend you save for retirement first. Those matching funds are just too good to pass up, so always contribute at least enough to max out what your employer will give you for free. But if you don’t have a workplace retirement plan, or you’re a great saver and max it out, taking advantage of an IRA is a smart way to secure your financial future.

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More Resources:
Roth vs Traditional IRA Calculator

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.