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You’ve heard how awesome Roth IRAs are and how starting one now can mean big bucks when you’re older. You’ve even done some research so you have a vague idea of how a Roth IRA works. Now what? How do you actually start one yourself? It’s surprisingly easy to set up a retirement account and to begin investing in your future.

Before you invest
Saving for retirement is important, but there are other aspects of personal finance, and you should take care of two of them before opening a Roth IRA.

  1. Tuck away at least $1,000 for emergencies.
  2. Pay off your credit card debt. At the very least, make significant headway on your debt and have a plan for its elimination. (I chronicled my choice between debt and savings in April.)

Here’s one excellent way to begin your retirement savings: When you’ve finished paying off your debt, take the amount you were using for this each month and, instead of spending it, stick it into a retirement account. You’ve already developed the habit of using the money to improve your financial life; this is just another way to do it!

Where to open a Roth IRA
Deciding where to open your Roth IRA is the most difficult part of the process! Many financial institutions offer IRAs. Each place has its own strengths and weaknesses. It’s important to search for a company that suits your needs. Don’t fret about finding the perfect match — find a good match and then get the IRA in motion. Questions to ask during your research include:

  • Is there a minimum initial investment? Minimum contributions?
  • What sorts of fees are assessed to the account?
  • Does the company offer automatic contributions?
  • What investment options are available? Can you invest in stocks? Mutual funds? Real estate?
  • Is it possible to download statements automatically into Quicken?
  • How reputable is the provider?

If you already have an investment advisor, ask her for recommendations, but look for other options, too. Some banks and credit unions offer Individual Retirement Accounts. My credit union, for example, has Roth accounts, but they’re limited to certificates of deposit at 1.50%. ING Direct offers Roth IRAs with a $10 annual fee and no other commissions or fees. Their investment minimums are low, but their universe of funds is very limited.

If you’re willing to make some decisions on your own, you can open a self-directed IRA through a mutual fund company or through an online discount brokerage.

The Big Three
In his guest post “An Introduction to Mutual Funds”, Vintek recommended starting at one of the Big Three: Fidelity, Vanguard, or T. Rowe Price.

I call these fund families the Big Three not only because they’re enormous, but also because they have a variety of funds that cover every investment style and segment you could wish for. [...] If you’re just starting out, you should probably pick one family and stay with it. You’ll be able to track all your investments more easily in one place.

I explored each company’s web site to discover what sorts of Roth IRA options they offered for beginning investors. Here’s what I found.

Fidelity Investments offers a no-fee IRA. There’s a $2,500 minimum initial deposit, but this is waived if you commit to $200/month automatic contributions. They offer 4,500 mutual funds, about a quarter of which have no transaction fee. In short, you can open a no-cost IRA at Fidelity with a $200 starting investment if you invest in mutual funds and you agree to contribute $200/month. Apply for a Roth IRA with Fidelity.

It’s also possible to open a no-cost Roth IRA at The Vanguard Group. To do this, you must elect to receive electronic statements and start with $1000 in the company’s STAR fund. (The STAR fund is an mutual fund of mutual funds, a safe choice for beginners.) Additional contributions require a minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50. There are no fees to purchase the STAR fund. Start a Roth IRA at Vanguard.

T. Rowe Price charges $10/year for Roth IRA accounts until you have a balance above $5,000, after which there is no fee. You need $1,000 to open your IRA, but this minimum goes away if you sign up to contribute at least $50/month with the Automatic Asset Builder. There are no sales fees or commissions to invest this money in T. Rowe Price mutual funds. Open an IRA at T. Rowe Price.

The information here will get you started with the minimum investment and the lowest costs. If you have more money at your disposal, you have more options. It’s possible to make much more sophisticated trades with each of these places — purchasing stocks, for example — but not for free. I encourage you to look more closely at each company’s web site, and to read the literature for each investment you consider.

Discount Brokers
Discount brokers appeal to many people because they have a low barrier to entry. They offer lower fees than traditional brokers because they don’t have research departments and they don’t offer investment advice. They only act as middlemen for trading in the market.

I opened my Roth IRA at Sharebuilder after reading David Bach’s The Automatic Millionaire. It felt great to finally open a retirement account. (Seriously — I was stoked.) Now, though, I fret about the costs. Sharebuilder charges a $25 annual custodial fee for a Roth IRA, plus $4 every time I make an automatic investment. (Other transactions cost $15.95!) Because I’m careful, I’m not hit with a lot of fees. Though I love how easy it is to automate investing through Sharebuilder, my research for this article revealed two other discount brokers that look appealing.

People have all sorts of good things to say about Firstrade. This company offers a no-fee Roth IRA, but requires a $500 minimum initial investment and $100 subsequent investments. Firstrade charges $6.95 per transaction, though they do offer a wide range of mutual funds that one can purchase for no charge. Firstrade looks good for somebody who wants to invest in mutual funds, but doesn’t want to (or can’t afford to) sign on with a larger mutual fund company. Firstrade does not offer online registration, but you can begin the Roth IRA application process here.

Zecco, the new kid on the block, charges $30 a year to carry a Roth IRA. That’s it. There are no other commissions or fees unless you’re a very heavy trader. There are no minimum balances or contributions. From what I can tell, the Zecco investment universe includes most stocks and exchange-traded funds, including some tasty Vanguard index funds. Open a Roth IRA at Zecco.

Discount brokers are a good option if you’re primarily interested in purchasing individual stocks instead of mutual funds. They’re also a fine choice if you want to get started now, but can’t afford a program with one of the mutual fund companies. Another option if you’re short on cash is to open an CD-based IRA at a bank until you’ve saved enough for the minimum initial deposit at one of the Big Three.

How to open a Roth IRA
Here’s a secret: opening a Roth IRA is easy. Have you ever filled out a job applicaton? Have you ever applied for a credit card? Have you ever opened a bank account? Of course you have. That’s exactly what the process is like to start an individual retirement account.

Some firms require that you download the forms and then to mail or fax them to the company. Most places, however, provide online applications. Before you begin the application, you will need the following:

  • Your social security number.
  • Your bank account information.
  • Your employment information.
  • Some money. (Depending on where you choose to open your IRA, or you may need $25 or you may need $3000. )
  • About an hour of uninterrupted time. (Actually, you probably only need fifteen minutes, but allocate more time just to be safe.)

Gather this information in one location when you’re ready to begin. (If you’re opening an IRA through a brick-and-mortar bank or broker, take this info with you.) From this point, it’s simply a matter of answering simple questions. (English Major has a walk-thru of opening an IRA at Vanguard.)

Once you’ve completed the application process, you will be asked to transfer money to your account. This money will probably earn interest in a money market fund until you choose an investment. (In part three of this series, we’ll discuss good investment options for Roth IRAs.)

I’m a big fan of automatic investment plans. Most of the companies I mentioned earlier in this article offer some sort of program that will pull money from your bank account every month to invest in stocks or mutual funds that you designate. By setting aside $50 or $100 or $500 in this way, saving becomes a habit. You don’t notice the money is missing. It’s a regular expense becomes incorporated into your budget.

Now what?
That’s all there is to it. Really. The most difficult part of this process is deciding where to open an account. Set aside an hour or two some Saturday morning to explore your options over a cup of coffee. With some research, you should be able to find a company and program that fits your place in life.

I always believed opening a retirement account difficult. “Besides,” I thought, “I don’t have money to invest.” Last year I forced myself to find the time and the cash to open a Roth IRA, and it has been one of the best financial decisions I’ve ever made. My account balance is small, but I love to watch it grow!

The GRS Introduction to Roth IRAs series
Part 0: How compound returns favor the young
Part 1: What is a Roth IRA and why should you care?
Part 2: How to start a Roth IRA (and where to do it)
Part 3: Which investments are best for a Roth IRA?
Part 4: Questions and answers about Roth IRAs

Remember: I’m just learning about IRAs myself. I’m sure to have missed some things. Fortunately, there are some sharp Get Rich Slowly readers out there to clear up mistakes. (I’ll incorporate corrections into the body of the post.)