Roth IRA investing

A Roth IRA (Individual Retirement Account) is a tax-advantaged retirement savings account funded with after-tax dollars. The key benefit: your money grows tax-free, and qualified withdrawals in retirement are completely tax-free.

43 steps across 12 sections

1. Confirm Your Eligibility

  • You must have earned income (W-2 wages, self-employment income, etc.)
  • Your MAGI must be below the income limits above
  • Passive income (dividends, rental income, capital gains) does NOT count as earned income
  • A non-working spouse CAN contribute via a Spousal Roth IRA if the working spouse has sufficient earned income

2. Open the Account (15 minutes online)

  • Government-issued photo ID
  • Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
  • Bank routing and account numbers for funding
  • Employer information
  • Beneficiary information (who inherits the account)

3. Fund Your Account

  • Bank transfer (ACH) — most common, 1-3 business days
  • Wire transfer — same-day but may incur fees
  • Check — mail a check to the custodian
  • Transfer/rollover — move funds from another IRA or retirement account

4. Intermediate/Advanced Options

  • Individual stocks — higher risk, higher potential reward
  • Bond funds — fixed income for stability (e.g., BND, AGG)
  • International stock funds — emerging markets, developed markets
  • REITs — real estate exposure (particularly tax-efficient in a Roth)
  • Sector ETFs — technology, healthcare, energy, etc.

5. What You CANNOT Hold in a Roth IRA

  • Collectibles (art, antiques, gems, stamps, most coins)
  • S-corporation stock (in some cases)

6. Tax-Efficient Placement Strategy

  • High-growth investments (more gains = more tax savings)
  • REITs (which produce tax-inefficient dividends)
  • Actively managed funds with frequent trading
  • Bond funds that generate taxable interest

7. Who Needs This?

  • Single filers earning above $168,000
  • Married filing jointly earning above $252,000

8. How It Works (2-Step Process)

  • Contribute to a Traditional IRA — there is NO income limit for non-deductible Traditional IRA contributions ($7,500 or $8,600 if 50+)
  • Convert to Roth IRA — there is NO income limit on Roth conversions

9. Step-by-Step Backdoor Roth Execution

  • Confirm you have no pre-tax IRA balances (or roll them into a 401k)
  • Open a Traditional IRA (if you do not have one)
  • Make a non-deductible contribution of $7,500 (or $8,600 if 50+)
  • Wait a brief period (some advisors suggest a few days; others convert immediately)
  • Convert the entire Traditional IRA balance to your Roth IRA
  • File IRS Form 8606 with your tax return to document the non-deductible contribution
  • Repeat annually

10. Requirements

  • After-tax (non-Roth) contributions beyond the standard $24,500 limit
  • In-plan Roth conversions OR in-service distributions to a Roth IRA

11. The Three Types of Roth IRA Money

  • Direct contributions — money you contributed directly
  • Conversion amounts — money converted from Traditional IRA or 401(k)
  • Earnings — investment growth

12. Withdrawal Order (IRS mandated)

  • Contributions (always tax-free and penalty-free)
  • Conversions (FIFO — first in, first out)
  • Earnings (last out)

Common Mistakes

  • Not investing after contributing
  • Contributing over the income limit
  • Exceeding the contribution limit
  • Ignoring the pro-rata rule
  • Withdrawing earnings early

Pro Tips

  • Front-load contributions
  • Automate everything
  • Use the Roth for your highest-growth investments
  • Hold REITs in your Roth
  • Consider the "Roth Conversion Ladder"

Sources

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