Opening a Roth IRA on your own: when it works and when help pays for itself

Yes, you can do it yourself, and many people should

You can open a Roth IRA on your own; you do not need an advisor to do it, and the paperwork is short. What matters more than who opens it is whether you are eligible to contribute, what investments you choose inside it, and whether it is the right account for your next dollar given your debts, emergency savings and protection. If you are confident on those points, do it yourself. If any of them is unclear, a licensed professional can save you from mistakes that cost more than the advice.

I say this as someone who opens these accounts for families every month. A Roth IRA is a container, not an investment. The container is simple; the decisions about what goes in it, and when, are where most people need a second set of eyes.

What a Roth IRA is, in plain terms

The IRS describes the core trade clearly. Contributions to a Roth IRA are not deductible, so you get no tax break when you put money in. In exchange, qualified distributions are not taxed. A traditional IRA works the other way: contributions may be deductible if you qualify, and deductible contributions and earnings are taxable when they come out.

There are conditions. FINRA explains that for a withdrawal of earnings to be qualified, the account generally must have been held at least five years and the withdrawal made after age 59½, or because of disability or death. Earnings taken out early can face a 10 percent penalty unless an IRS exception applies. The IRS also notes that, unlike a traditional IRA, a Roth IRA has no required minimum distributions for the original owner, which gives you more control over when the money comes out.

Check whether you can contribute before you open anything

Eligibility is the first place do-it-yourself savers trip. According to the IRS, you can contribute to a Roth IRA at any age as long as you have taxable compensation and your modified adjusted gross income is below certain amounts. Those income limits depend on your filing status and change from year to year, so look up the current table on the IRS website rather than relying on a number you heard last year.

Two other rules catch people. First, the IRS notes that contributions to all your traditional and Roth IRAs share one combined annual limit, so having two IRAs does not double what you can put in. Second, FINRA points out that a spouse without earned income may still be able to have an IRA through what is called a spousal IRA. If your household's income is near the limit, or one of you does not work outside the home, it is worth confirming the details with a tax professional before you contribute.

• Do you or your spouse have taxable compensation this year?
• Is your household income comfortably below the current Roth limit for your filing status?
• How much have you already contributed to any IRA this year?
• Are you contributing for the right tax year, before the filing deadline?

Opening the account takes an afternoon

If you qualify, the mechanics are straightforward. You choose a financial institution that offers Roth IRAs, complete an application with your personal information, name your beneficiaries and fund the account by transfer. The IRS notes that the account must be designated as a Roth IRA when it is set up, so make sure that is what you are opening and not a regular taxable account.

Timing is more flexible than people think. The IRS explains that the contribution deadline for a given year is your tax return filing deadline, not counting extensions, which FINRA notes is April 15 for most people. That means you can often still contribute for the previous year in the early months of the next one. Tell the institution which year a contribution is for when you make it.

Two small choices at setup make a large difference later. Name a primary and a contingent beneficiary, so the account passes the way you intend. And set up an automatic monthly contribution from your checking account, even a modest one, so saving happens before the money is spent. A contribution that depends on remembering each month tends to stop the first time the budget gets tight.

Where people on their own usually get stuck

Opening the account is rarely the problem. What happens after is. The most common issue I see is money that goes into a Roth IRA and is never invested. Depending on the institution, a deposit may simply sit as cash until you choose an investment, and some people do not realize that for years. The account looks funded, but the money is not working toward retirement.

The second is picking investments without a plan. People choose a fund because a coworker owns it or because last year's performance looked good, without thinking about how long the money will be invested or how they would react if the balance dropped. The third is contributing to a Roth while carrying expensive credit card debt or no emergency fund, so the first emergency forces a withdrawal. I explain why order matters in putting protection and savings in order.

• Deposits left uninvested in cash
• Funds chosen by recent performance rather than time horizon
• Contributions above the limit or after income has passed the threshold
• No beneficiary named, or an outdated one
• Skipping the emergency fund and pulling money out early

Signs it is worth getting help

Some situations are simple enough to handle alone; others reward a conversation. If any of the following describes you, I would talk to a licensed professional before you act, and to a tax professional where taxes are the question. A CPA such as Joe Hockaday can tell you how a contribution or a conversion affects your return, while an investment professional can help with what goes inside the account and how it fits the rest of your plan.

Many of the Dallas families I meet opened an IRA years ago, contributed once or twice and then lost track of it. If that sounds familiar, the account is not a failure; it is a starting point. Gather the most recent statement and look at what it holds before deciding whether to keep adding to it, consolidate it or leave it alone.

• Your income is close to the Roth limit, or it changes a lot from year to year
• You have an old 401(k) and are not sure whether it should move
• You are deciding between a Roth and a traditional IRA and the tax answer is not obvious
• You also need life insurance, an emergency fund or college savings and are unsure what comes first
• You know you will not look at the account again unless someone reminds you

Roth or traditional: the question behind the question

Many people asking about a Roth IRA are really asking whether to pay tax now or later. With a Roth, you pay tax on the money before it goes in; with a traditional IRA, you may get a deduction now and pay tax when you withdraw. FINRA notes that if your income in retirement is lower than it was while working, you might pay those deferred taxes at a lower rate, which can favor the traditional side. If you expect your tax rate to be the same or higher later, the Roth side often looks better.

No one knows future tax rates, which is why some households use both kinds of accounts over time. The decision depends on your current bracket, your expected income later and the eligibility rules, so it belongs in a conversation with a licensed representative and your tax advisor rather than a blanket rule.

A practical way to think about it: a younger saver early in their career, in a lower bracket than they expect to reach later, often has a reason to lean toward the Roth. A household at its peak earning years may see more value in a deduction today. Neither is a rule, and your own numbers should decide.

How the Roth fits with everything else

A Roth IRA is one tool among several. If your employer offers a retirement plan with a match, many people contribute enough to receive the match before funding an IRA, and that is a common question in my first meetings. If you have an old workplace plan, rolling it to an IRA is a separate decision with its own rules, which I cover in what an old 401(k) rollover involves. And if you are also saving for a child's education, a Roth IRA and a college savings plan serve different purposes, explained in saving for college as a Texas family.

If you decide to work with someone, interview them first. The questions I would ask are in what to ask a financial advisor before hiring.

If you would like a hand with yours

I open traditional and Roth IRAs for families as part of a broader plan, using established asset managers and a long-term approach. We look at eligibility, the emergency fund, protection and any old accounts first, then decide what goes into the IRA and how much to contribute each month. I am a registered representative of PFS Investments Inc. and licensed for investments in Texas and several other states, and most of the families I work with live around Dallas.

Investments carry risk, including the possible loss of principal, and no return is promised. What I can promise is that you will understand what is in your account and why. There is no obligation in a first conversation, and if your situation is simple enough to handle on your own, I will tell you.

Questions people ask me