What to Know When Setting Up Your Roth IRA

If you want to live the good life in your golden years, then retirement savings should be a part of your budget sooner rather than later. Luckily, the government gives you tax breaks if you save through certain accounts, like a Roth Individual Retirement Account; the sooner you open up a Roth IRA, the longer your nest egg will have to grow tax-free. 

Note, however, that with a Roth IRA account, you can only make withdrawals tax- and penalty-free if you've been contributing for at least five years and you’re over 59½ years old. You can, however, receive an early withdrawal exemption if you’re permanently disabled, if you’re withdrawing up to $10,000 for a first home purchase, or if the payments are made to a beneficiary or to your estate after your death. Here are some other tips about how to get started.

Where to Set Up Your Roth IRA

You can't keep money stashed under your bed and call it a Roth IRA. Thankfully, there are many types of providers, including banks, mutual fund companies, life insurance companies, brokerages and credit unions such as Navy Federal Investment Services. Look at the investment options each offers and how much you'll pay in fees, if any. Common Roth IRA investment options include stocks, bonds, mutual funds, exchange-traded funds, money market accounts and certificates.

Some financial institutions don't charge an annual fee, but you may pay overall management fees, depending on the type of investment. For example, if you invest in the stock market, fees are assessed on the amount of your investment, depending on the level of service you choose. Make sure you read the fine print and ask lots of questions before signing on the dotted line.

Eligibility for Creating a Roth IRA

To put money in a Roth IRA, you must have less than a certain amount of taxable income from work, like wages, overtime or a bonus. According to the IRS, the amount of Roth IRA contributions that you can make for 2024 depends on whether your filing status is single or married, and can change each year. For instance, in tax year 2024, you can't contribute to a Roth IRA if you're a single filer and earn more than $161,000, and the amount you can contribute is reduced if you make more than $146,000. If you're married, the income limit for the maximum annual contribution is $240,000, with phase-outs starting at $230,000. If both you and your spouse are working, you must open separate Roth IRAs—you can't have a joint Roth IRA. But, as long as you're both eligible for this type of IRA, you can make full contributions to your own accounts.

Application Process

Each financial institution has its own application form and process for opening a Roth IRA. But, they all ask for your name, address, Social Security number and how you want the money deposited. For example, you can put some of your contribution into a mutual fund and another portion into a certificate. If you have questions, the person helping you open your Roth IRA should have the answers.

You can easily fund your Roth IRA by making a transfer from your existing checking or savings account. Navy Federal also accepts rollovers and transfers if you’d like to use funds from an existing Roth or post-tax, employer-qualified retirement plan. Then, designate a beneficiary (the person or people who would inherit your account balance if you were to pass away before cashing it out). 

IRA Contribution Limits

The amount you can contribute to your Roth IRA is limited each calendar year. If you also make contributions to a traditional IRA, the total contribution amount cannot exceed your limit for the year. For 2024, it's $7,000 if you're 50 or younger. If you're over 50, it's $8,000. If your earned income is less than the contribution limit, you can put in only the amount of your income. So, if you earned only $5,000 because you were out of a job most of the year, $5,000 is all you can contribute to your Roth IRA that year.

If you're married and file a joint tax return, the IRS allows you to count the earned income of your spouse toward your eligibility to contribute the maximum to a Roth IRA. If you're a stay-at-home parent with no earned income of your own, you can still make a Roth IRA contribution based on your spouse's earnings. 

Roth IRAs are a good retirement vehicle for people, but it’s important to understand what you’re investing in before you do so. Getting in touch with a financial advisor can help you decide if this is the right move for your retirement goals.

Navy Federal Financial Group, LLC (NFFG) is a licensed insurance agency. Non-deposit investments, brokerage, and advisory products are only sold through Navy Federal Investment Services, LLC (NFIS), a member of FINRA/SIPC and an SEC-registered investment advisory firm. NFIS is a wholly owned subsidiary of NFFG. Insurance products are offered through NFFG and NFIS. These products are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of Navy Federal Credit Union (NFCU), are not offered, recommended, sanctioned, or encouraged by the federal government, and may involve investment risk, including possible loss of principal. Deposit products and related services are provided by NFCU. Financial Advisors are employees of NFFG, and they are employees and registered representatives of NFIS. NFIS and NFFG are affiliated companies under the common control of NFCU. Call 1-877-221-8108 for further information. This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.