How Much Money Do You Need To Start A Roth (Or Traditional) IRA

Joseph Meyer
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Table of Contents

Which IRA Am I Eligible For?

How Much Money Does it Take to Start an IRA?

A new year means a fresh start for your finances and a chance to open an IRA account.

IRA can be great, but it can be confusing to know where to start. Most of the time, taxpayers have to work with a professional to open an IRA, which requires the person to have a certain amount of income.

There are other questions to consider when it comes to paying taxes and how to go about claiming a refund. With so many rules and regulations, it doesn’t help that figuring out how much you have to make to qualify for an IRA is a headache in itself.

Fortunately, there’s a magic number to know if you’re thinking of starting an IRA. This number, however, changes from year to year and depends on whether or not you pay taxes as a single filer or married person filing jointly.

How to Start Investing in an IRA

Whether it’s a Roth or traditional IRA, it’s never too early to start investing for retirement. In fact, contributing to an IRA so early on in life will help you significantly grow your retirement nest egg (including tax savings).

The process of investing in an IRA is quite simple: choose an investment vehicle, and then invest! The tricky part is finding the money in the first place … but there are a few ways you can do it.

One way is to simply make deposits with cash. Setting up automatic transfers to your IRA each month allows you to put money aside without even thinking about it. However, the sooner you make your deposits, the less likely you are to spend it, so consider contributing when you get your paycheck.

Another option is to make deposits using a loan, particularly from your 401(k). This loan, or rather, the interest you have to pay on your loan, is tax-deductible, meaning you can opt to borrow the money and still contribute that cash towards your retirement. With the loan interest, you’ll pay a little less in taxes. This seems like a great idea… but you have to remember that you’ll have to pay back a lot of money.

Compare online brokerage firms that offer IRA accounts

Once you have decided that you want to start an IRA, choosing a broker is the next step. There are many online brokerage firms that offer IRA accounts; these are firms that allow you to buy and hold investments, mutual funds, and ETFs within an IRA account.

Before you select an IRA broker, you should evaluate the overall features that the account has to offer.

The price of the account may well be different between firms. A broker may offer an IRA account for free, but another firm might charge a fee for making the account.

There are other things to consider, such as fees, commissions, and platforms that the firm offers. All of these contribute to the total cost of operating your IRA.

So how much do individual investors pay each year to operate an account? The best measure is the total expense ratio (TER). It is a standardized number that gives you an overall idea of what you are charged to operate an IRA.

The calculator on the next page from the SEC will help you compute the costs. You can enter information on your monthly contributions or the average annual balance that you will use to figure out the Operation Expense (the IRA itself), the Operating Profit (the difference between the two), and the Opportunity Cost.

Even though you pay money into your IRA, the portfolio might not perform well enough to overcome these expenses.

Fund your account

If you earned no income last year, then you can make an IRA contribution, but you must make a qualifying contribution and you can't deduct it.

Select your investment strategy

When you hear of financial goals, you might think 401(k)s, IRAs and Roth IRAs. What are they? What do they mean? Why should I care about them? Depending on how you answer these questions, one of these IRA-like options might be the perfect gift to give your future self.

Let’s take a look at the similarities and differences between the two options and then we’ll talk about how/when to open an IRA. Finally, I’ll show you some real numbers so you can see how much you can contribute, both now and in the future.

Make it automatic

Option 1: Fund Your IRA with Automatic $ directly from Your Checking Account. You have two ways to fund your IRA:

{1}. You can have your new company (ie. your employer) take $ of your salary and directly deposit it into your IRA account.
{2}. You can sign up with one of the many banks and other companies which allow you to directly deposit money into your IRA. This requires opening an account with the bank/company and linking this account into your IRA brokerage account. Some companies will charge a small fee, others will not.

Make sure that you indicate that the money is for an IRA and that you want it to go into the proper stock fund or bond fund.

The bank will then transfer the money into your IRA within a few business days. Of course, you will pay tax on the amount your employer takes out.

Check in regularly and stay on track

Keep yourself motivated by tracking and visualizing your progress each month. When you check in, write it down on your progress tracker or in your journal.

Visualize your progress “ this is great for an added motivator. Fantasy football players use this same technique when they are putting together their weekly or season long roster. Most fantasy football players rank their players, and as the season goes on, they visualize their already high ranked players performing well and getting bigger win bonuses or championships. After visualizing this, they commit to the best players and stay motivated to win.

Create a daily to-do list. Make it as detailed as possible. List out the specific action steps required to keep you on track to reaching your goal. When you start to waver from your overall goal, just refer to your daily to-do list. Doing daily action tasks will keep you on track. It also helps you to see how much you’ve accomplished each day.

Know the IRA Rules

When it comes to setting up and managing an IRA, there are a few details you should know. Setting up a Roth or traditional IRA doesn’t have to be complicated. Below, we’ll provide a quick summary of the requirements for both accounts and answer some of the most popular questions about IRAs.

Summary

In the United States, there are two main retirement planning vehicles that can be used to fund your retirement. The first is an Individual Retirement Account (IRA). The second is an employer sponsored retirement plan, commonly referred to as a 401(k) plan. In this article, I’ll be covering the IRA.

The idea behind these accounts is to let retirement income accumulate tax free until you withdraw the funds in retirement. The benefit, other than paying less in taxes for those who choose a Roth vehicle, is that it is possible to invest aggressively inside of an IRA without any tax consequences. The only catch is that you can not withdraw from a Roth IRA or a Traditional IRA before age 59.5 without paying a 10% penalty.

About the Author

Joe is the founder of Retirement Made Easy, where he blogs about obtaining financial independence and how to live an easy life in retirement. Joe is an active participant in the world of personal finance and has been working in the industry since 2004. He has written about personal finance for several popular websites, including CBS Money Watch, AOL Money, Debt, personal finance, and NerdWallet. Joe holds a bachelor’s degree in psychology and earned his MBA from Florida International University.

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