Ready to Invest? We Asked an Expert How to Choose a Roth IRA

Updated 04/24/19
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When I read The Financial Diet earlier this year, a line from it stuck with me: "Money is a tool, not a goal." When Jane Hwangbo gave this advice to author Chelsea Fagan, she basically meant that all financial decisions either help or separate us from larger accomplishments. So everything from taking a vacation to paying off student loans to buying a house can be goals that include income as a carefully executed tool.

In general, planning for these goals is straightforward. But what about retirement? With so many different ways to set up a retirement account, it's tough to know where to start. Take the Roth IRA, for instance. How do you get one? What does it do? Thankfully, we asked Kristin O'Keeffe Merrick, a financial advisor at O'Keeffe Financial Partners, to give us an easy-to-understand outline of what this particular account is.

Using her help, we can better understand how to choose a Roth IRA and use it as a tool that'll eventually get us to a bigger goal.

how to choose a roth IRA
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What is the simplest way to define a Roth Ira?

"A Roth IRA is a specific type of account, not an investment. It is considered to be a 'qualified account,' which means it has certain tax advantages associated with it," Kristin says. 

Start by opening an account at a financial institution of your choice, and then fund it. Kristin says that most banks, asset managers, and brokerages can open an account for you. 

"If you are eligible to contribute for a Roth and are under the age of 50, you can contribute up to $5,500 a year to it. If you are older than 50, you can contribute up to $6,500 a year," she says. 

Big takeaway: "Not everyone is eligible for a Roth, as there are income restrictions," she says. "For 2018, if you are a single filer, you must have a modified adjusted gross income of less than $135,000 a year in order to make contributions, and contributions are reduced starting at $120,000 a year. If you are married, you must have a modified adjusted gross income of $199,000 or less, but contributions are reduced starting at $189,000 a year." 

How is it different than a Traditional IRA or a 401(k)?

For most other "qualified" accounts—like a traditional IRA or a 401(k)—you pay taxes on the money you withdraw in retirement. That's not the case for a Roth IRA, Kristin says.  

Big takeaway: "You fund the account with after-tax dollars (there is no tax deduction for contributions to a Roth), and the money will grow tax-free, assuming you do not make any withdrawals until you are at least 59.5 years old," Kristin says. "This means that when you withdraw the money in retirement, you do not pay taxes on it."

Are some Roth IRAs better than others?

"All Roth IRAs are the same," she says. A Roth is an account, not an investment. Once you open a Roth at the financial institution of your choosing, you must fund it with after-tax money and then make investment choices."

Big takeaway: "You can buy securities like stocks, bonds, and mutual funds in a Roth," Kristin adds. "If you don't know how to choose investments or need advice, you should contact a financial advisor."

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