You've finally been convinced that opening a Roth IRA is a good idea, and you've decided to take the plunge. Great! But what's next? How do you open an account, and where are some good places to hold your Roth IRA?
Today I'd like to cover the basics of opening a Roth IRA and look at a few good low cost brokerages where you can keep your account.
Take Care Of The Basics Before Your Roth IRA
Before we even jump into the basics of opening a Roth IRA, I suggest that you first get the rest of your financial house in order. That means doing the following things:
- Save up an emergency fund: We've saved up 12 months of expenses to cover just about any eventuality that might come up. I'd suggest you save at the bare minimum $1000, but even better – 3-6 months of expenses.
- Pay off all debt: I suggest you pay off all debt that you might have. If you don't any gains you might realize by investing will be offset by large debt interest payments. Get it paid off ASAP!
Once you've paid off all your debt and saved for a rainy day, you're probably read to start investing. At our house we follow the Dave Ramsey plan – but not to the letter. He suggests investing 15% of income. We're going to invest closer to 20-25%.
So what's an easy way to get started investing? When you've paid off all your debt, take the money you were paying on that debt, and instead start investing it.
My suggestion for investing is as follows. Invest in a company 401(k) or other employer sponsored plan up until the match (100% return!). After the match switch over to the Roth IRA (which we're talking about today!). After the Roth IRA switch back over to your 401(k) until it is maxed out. So again – this is the order:
- 401(k) til employer match is reached.
- Roth IRA til maxed out.
- 401(k) (or other plan) til maxed.
How To Open A Roth IRA
Opening a Roth IRA shouldn't take very long, and in most cases can actually be done in a half hour to an hour.
When opening an account usually you'll need the following information – although it may vary a bit from institution to institution.
- Social security number.
- Bank account information.
- Information about employment.
- Money to open the account. (You may need $25 or you may need $3000 depending on where you open your account. )
- An hour or so.
Before you even open an account, however, you'll need to figure out what financial institution, mutual fund firm or brokerage you want to open your account with.
Your local bank or credit union can often open up an account for your Roth IRA. While having an account with your local bank is usually convenient, it isn't often the best option. The reason? The banks usually have limited investment options for your account, usually limited to CDs, money market funds, and other cash accounts. The fees they charge are also often higher than the fees you would find with a discount brokerage or full service mutual fund firm.
Full Service Mutual Fund Firms
Full service mutual fund firms are typically one of the better places to start your account because they will have a nice variety of mutual fund options with low expense ratios and varied investment options. They are quite often the best place to purchase index funds, target date retirement funds, mutual funds and similar investments. Some of the better options that offer Traditional and Roth IRAs and many investment options include.
The downside to investing at one of these firms is that they often have minimum investments that you can make, which if you don't have a lot to start your account with can mean you're not able to invest with some of the companies. Some will also charge more for individual trades, and have account management fees. Some of these fees can be waived if you make a certain minimum investment and/or if you commit to investing a certain amount every month. Before you sign up, make sure you know what the minimums, fees and other account terms are.
The key to opening an account with a mutual fund firm is to do your research and to know what you're getting into. Never invest in something you don't understand.
Discount Brokerages & Robo Advisors
If you're a more hands on investor or you like to invest in single stocks an online discount broker might be a good option for your account (I like to buy index funds at a mutual fund firm and forget it myself!). Discount brokerages will allow you to access stock trades, options trades, Exchange Traded Funds (ETFs), mutual funds and other assorted investments. Individual stock trades will usually cost in the $2 – $10 range, which is probably going to be cheaper than making stock trades at a mutual fund firm listed above. Some of the options I recommend:
Listing Of Mutual Fund Companies And Brokerages
To bring it all together, here's a list of some of the best mutual fund companies, discount brokerages, and their fees.
Account Minimum Mutual Fund Commission Stock Commission Annual IRA Fee Reviews
OptionsHouse $1,000 $9.95 $3.95 none OptionsHouse Review
Motif Investing $1000 $9.95 (per motif/bundle of stocks) TD Ameritrade none $0 $9.99 none TD AmeritradeReview
Zecco none $10 $4.50 $30 TradeKing none $14.95 $4.95 none Scottrade $2500 $17 $7.00 none Scottrade Review
Vanguard none $0 $7.00 $20 tradeMONSTER none $15 $7.50 none Fidelity none $0 $7.95 none Schwab $1,000 ? $8.95 none ShareBuilder by Capital One none $19.95 $6.95 none ShareBuilder by Capital One Review
Etrade none Up to $19.99 $9.99 none optionsXpress none $14.95 $14.95 none
What To Invest In
The next most important thing to decide is what to invest in once you open your Roth IRA. If you're just starting out like I am I'd probably suggest to find a good index fund and some low cost mutual funds. If you're newer to investing as I am or if you don't want to be actively managing individual stocks/etc, starting out with a good index fund will probably be a good option. Depending on which Roth IRA account custodian you choose, your options for investments may vary. Again, do your homework, and choose one that works best for your situation.
Do you have a Roth IRA? What type of account custodian did you choose (mutual fund firm, discount brokerage, bank or credit union)? What types of things are you investing in? Tell us your thoughts on opening a Roth IRA in the comments.