I know this sounds crazy, but hear me out.
When you go to a rock concert, there’s a logical progression to the show that ensures everything runs smoothly and you have an awesome time: a sound check, opener, headliner, and an encore (assuming it’s a good band). Opening a Roth IRA and investing is no different. If you follow the same progression that you go through every time you see a concert, you’ll be Ready to Roth in no time.
Mic Check: is this thing on?
Every good show starts with a sound check, right? This first step is crucial to make sure the equipment is plugged in and working, the lights are ready to go, and the sound levels are perfect so the bass isn’t drowning out the rest of the band.
Add the below steps to your Roth IRA sound check to make sure you don’t have any mishaps during your show.
Eligibility
To contribute the maximum amount possible to a Roth IRA, you’ve gotta make less than $125,000 per year if you’re single. If you make between $125,000 – $140,000 then you can still contribute, but the amount is reduced.
If you’re married or make over 125k, check out the IRS eligibility guidelines here.
Earned Income and Contribution Limits:
You also need to make sure you have earned income, which is money from a job or self-employment. This is important because you pay taxes on this money before you put it into your Roth IRA so that you don’t have to pay taxes on it later when you take it out.
If you’re under age 50, then you can contribute up to $6,000 per year to a Roth IRA. If you’re 50 or older, you can contribute up to $7,000.
The Opener
The job of the opening band is to get the crowd engaged and ready for the headliner. For your Roth IRA, this is where you actually set up the account so you can get ready to invest.
Choose your Brokerage Company
There are a lot of companies that offer Roth IRA accounts. The best Roth IRA providers offer a wide range of investment options and low-fee funds, which is why I recommend using a large online brokerage provider like Vanguard or Fidelity.
- Vanguard: The best option if you have at least $1,000 to invest right now.
- Vanguard is a market leader and has consistently offered low-fee funds with great returns. This is where I have my Roth IRA. There is a $1,000 minimum to buy into their funds
- Fidelity: The best option without minimum investment amounts.
- Fidelity is another great option, especially for investors who can’t meet the $1,000 minimum right away. They offer great low-fee investment options and consistent returns. If you don’t have $1,000 right away, open an account at Fidelity.
Open Your Account and select an Initial Contribution
Alright, so you’re either investing with Vanguard or Fidelity – that’s great. Now you need to navigate to the website and select “Open Roth IRA.”
- Open Your Vanguard Account
- Choose “Open Your Retirement Account” and complete the questions. When asked Why are you investing, select “Retirement” and then “Roth IRA.”
- Open Your Fidelity Account
- Select “Open Roth IRA”
Next, connect your bank account to your new Roth IRA. This will be used to fund your account and set up automatic monthly investments later. If you choose Vanguard, you need to transfer at least $1,000 into the account now. If you choose Fidelity, transfer any amount that you’re comfortable with. Try to start with at least $50.
The Headliner
Ready for the best part of the show? It’s time to invest! Everything we did before was just getting you ready for this moment. Investing is the most important part of your Roth IRA because this is how your money actually grows over time. You can even use a Roth IRA calculator to estimate how much it will grow.
It will take a few days for your initial contribution to show up in your account. Once the money is available, it’s time to choose your investments. You can choose multiple investments or one Target Date Fund, depending on how involved you want to be in your account. In this article I’ll discuss the 2 best low-fee, hands off investing options that I use: Target Date Funds and Index Funds
Investing in a Target Date Fund
Target Date Funds are investment funds based on the year you expect to retire. Vanguard calls them “Vanguard Target Retirement” funds and Fidelity calls them “Fidelity Freedom” funds. Your brokerage company manages these funds and makes sure that your investments within the fund are diverse and the risk tolerance is appropriate based on your age. These funds offer super low fees and they are extremely easy to manage. Just figure out what year it will be when you turn 65 (or whatever age you plan to retire) and then choose the fund closest to that year.
Investing in Index Funds
Index Funds are low-fee investment funds that include a large portfolio of stocks or bonds, and the goal of an index fund is to just mirror the financial markets. So if the value of the market grows, then your money grows. If the market drops, then your money drops too. This type of fund is not actively managed by a person, so you don’t have the risk that comes with someone sitting behind a screen trying to “pick the winning companies” that they think will grow the most.
This strategy relies solely on the natural rise and fall of the financial markets, and the average stock market return is about 8% per year once you factor in inflation. So using index funds is a great long-term investing strategy because it makes sure that you receive the same success that the overall financial markets do over a long time period.
If you want to pursue index fund investing, do some research at your brokerage company to see what index funds are available. You’ll want to invest your money in a combination of US and International index funds. If you’d like to talk about this strategy further, just reach out via my contact page and we can discuss this strategy further.
Encore
Every great show has an encore right? When it comes to your Roth IRA, the encore is automatic investing. Make sure you don’t skip this step!
Automate your investments
Once you’ve set up your Roth IRA and invested your initial contribution, it’s important to keep contributing to your account. You can set up automatic monthly investments so you can take full advantage of compound interest – it’s like money magic for long term investors.
- Within your brokerage account, find the “automatic investments” section. Configure your automatic investments to come directly out of your checking or savings account, whichever you prefer.
- Determine how often and how much you want to invest each month. Keep in mind you can contribute up to $6,000 per year if you’re under 50, and I recommend getting as close to this contribution limit as you can.
- Make sure to fill out the section about “Where to invest this money.” If you don’t fill out this section, then your automatic investment will just sit in your Roth IRA like it’s a savings account. Make sure to put the automatic investment money into your Target Date Fund or Index Fund investments.
Is the show over?
Yes, and you’re officially a Rother – congrats! All you have to do from here is let the stock market do its thing and go back to rocking out.
If you still have questions about this process and want to talk through it together, click the button below and let me know what’s on your mind and the best way to reach you. You’ll be Ready to Roth in no time.
I hope the next time you’re at a concert you think about your Roth IRA and it reminds you to invest more. Your future self will love you for it.
P.S. If you’re a parent and you want to help your child Roth out just like you, check out this article by Logan Allec, CPA: Roth IRA for Children: How to Make Your Child a Millionaire
Disclaimer: I am not a certified financial advisor and this article is intended for educational purposes only.