How to open a Roth IRA
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 open a Roth IRA for yourself?
The good news is that it’s surprisingly easy to set up a retirement account and begin investing in your future. Here’s what to do…
How to open a Roth IRA
- Decide where to open your Roth IRA account. Financial services providers such as Vanguard or Fidelity will have IRA products.
- Gather your information.
- Transfer money into your account.
- Set up an automatic investment plan.
1. Where to Open a Roth IRA
One of the reasons people fret about opening a Roth IRA is because there are so many financial institutions offering IRA products. It’s important to search for a company that suits your needs, but how do you evaluate each company’s strengths and weaknesses?
Consider reputable Advice
If you already have an investment advisor, ask her for recommendations, but look at other options too. Some banks and credit unions also offer individual retirement accounts. My credit union, for example, has Roth accounts but they’re limited to certificates of deposit at 1.50%.
2. Gather Your Information
Gather all your information in one location when you are ready to begin. Most firms provide online applications, but some still require that you download forms and mail or fax them to the company. (If you’re opening an IRA through a brick-and-mortar bank or broker, take this information with you.)
From this point, it’s just a matter of answering simple questions. The entire process should take about an hour of uninterrupted time. (Actually, you’ll probably only need 15 minutes, but allocate more time just to be safe.) Before you begin the application, make sure you have all the documents listed below:
Here’s What You Need to Open an Account
- Your social security number.
- Your driver’s license or other photo I.D. like a passport.
- Your bank account information — your bank’s routing number and your bank account number.
- Your employment information — your employer’s name and address.
- Some money. (Depending on where you choose to open your IRA, you may need $25 or as much as $3,000.)
Note: For each beneficiary you choose, you will need to supply their name, social security number, and date of birth as well.
3. Transfer Money Into Your Account
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 4 of this series, we’ll discuss good investment options for Roth IRAs.]
4. Set Up an Automatic Investment Plan.
I’m a big fan of automatic investment plans. Most of the companies mentioned later in this article offer some sort of program that will pull money from your bank account every month to invest in the stocks or mutual funds 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 that just becomes incorporated into your budget.
A final note: Opening a new account usually is quick and simple. However, be aware that it may take a few weeks before you can start trading. That’s because they will wait for checks you send to properly clear the bank.
Ongoing IRA account transactions at banks, brokerages or mutual fund families happen quickly, but they all take some time to activate a new account. In other words, don’t become impatient if you can’t buy things right away.
Related >> IRA Contribution Limits, Deadlines and Deductions
Before You Invest
There are two things you should take care of before opening a Roth IRA:
- Tuck away at least $1,000 in a savings account for emergencies.
- Pay off your credit card debt. At the very least, make a significant dent in your debt and have a plan for its elimination. (I chronicled my choice between debt and savings here.)
Related >> Which online high-yield savings account & money market is best?
Related >> Real-life choices: Retirement savings vs. debt reduction
An Excellent Way to Begin Your Retirement Savings
When you’ve finished paying off your debt, take the amount you were using for debt reduction 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!
Consider Taking a More Active Role
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.
In general, you have two choices:
- A mutual fund family, like Vanguard or Fidelity, which will open an IRA account for free and sell you their funds for free. The benefit is that you pay no commissions, but the downside is you can only buy the funds they sell.
- A brokerage, which allows you to pick any index fund, managed mutual fund, or individual stocks and/or bonds but may charge a commission on each trade. The major online brokerages (E-Trade, TD Ameritrade, etc.) usually have no fees to open an IRA but will charge around $10 or less per transaction for most transactions.
How to Evaluate a Roth IRA provider
- Is there a minimum initial investment?
- Does the company offer automatic contributions?
- Are there minimum contributions?
- What types of fees are assessed to the account?
- What investment options are available — stocks? mutual funds? real estate?
- Is it possible to download statements automatically to your money management program?
- How reputable is the provider?
Mutual Fund Family
If you decide to go with a mutual fund family, many people recommend starting at one of the big three Vanguard, Fidelity, or T. Rowe Price because of the large variety of managed and indexed funds they offer. If mutual funds (indexed or managed) are the cornerstone of your investment strategy, it makes the most sense to go with one of the major fund families.
For those focusing on index funds, Vanguard is the most logical choice, because they specialize in index funds and offer the widest variety. They actually created index funds to begin with, and their costs tend to be the lowest.
Click here to open a Roth IRA at Vanguard.
For those who prefer managed mutual funds over index funds, your best approach is to go to a review site like Morningstar or Zacks to see which of the funds that pursue what you have in mind (e.g., foreign stocks, domestic bonds, etc.) perform the best.
Click here to open a Roth IRA with Fidelity.
All the major mutual fund families make it easy to open no-cost accounts. Simply go to their website and follow their instructions. But there are still other places that you can open a Roth IRA.
Click here to open an IRA at T. Rowe Price.
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 act purely as middlemen for trading in the market.
The primary benefit of using a broker is that you can pick from many different mutual funds or, if you prefer, individual stocks or bonds.
How to Bridge a Gap
Discount brokers are a good option if you are short on cash. Most of them will also offer a cash account, similar to a savings account. You can use that account to accumulate the money necessary to meet the minimum initial deposit.
Online discount brokers want your IRA business and, consequently, they make it very easy to open an account. You can compare their fine print details, but for the most part, their pricing is very similar.
The major players in the discount brokerage space are E-Trade, Scottrade, and TD Ameritrade. Simply visit their home page and look for the link offering a no-cost IRA account. Some have minimum deposits of $500 or so; but if you commit to a monthly automated contribution, many will waive that requirement.
Don’t Delay Because of These Misconceptions
I always believed opening a retirement account was difficult, but that’s all there is to it really. The most difficult part is deciding where to open your 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 also used to think, 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 I can say that it has been one of the best financial decisions I’ve ever made.
The GRS Introduction to Roth IRA Series
Understanding how important it is to get started saving for retirement, check out the rest of our Roth IRA series to learn about how to start your Roth IRA, which investments are best, and other general questions about these great accounts.
Part 1: The extraordinary power of compound interest
Part 2: What is a Roth IRA and why should you care?
Part 3: How to open a Roth IRA (and where to do it)
Part 4: Which investments are best for a Roth IRA?
Part 5: Questions and answers about Roth IRAs
Become A Money Boss And Join 15,000 Others
Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)
There are 213 comments to "How to open a Roth IRA".
I was recently looking at the Fidelity Roth IRA. I wanted to waive the initial minimum deposit, but was wondering if the $200/month is constant. In other words, do you have to commit to that amount every month? If so, it seems better to just wait until you have the minimum required and then control how much you want to put in each month.
I wanted to open one for both my wife and myself, so $400 total is a bit much (on top of our other savings, 401ks, bills, etc.) to be locked into for life just to avoid the initial $2500.
Make sure to look into using self directed ROTH IRA funding real estate transactions. You can explode your account with the right strategies – leveraging real estate. Example…
1. Buy, fix, and sell it for profit
2. Buy, fix, and rent them out and hold it
3. Lend money to developers who do #1 and 2
Jeff Coga
How do you find a good company to do the self directed Roth IRA? I like to deal with real estate, tax liens & tax deeds. Thanks
Well, no you don’t have to put in $200 on a set schedule. As a matter of fact, if you contact almost ALL of the brokerage/retirement account holders such as Fidelity and Schwab, you’ll find that you can open an account with only $5 or $10.
You may not be able to invest in specific funds right away, but you can put however much you can afford to in the account.
I did this recently with my own brokerage account, and so did a nephew of mine.
My father, a regular working guy who financed a 25-year retirement and left an estate gave this advice: always fund your retirement to the max, even if you have to borrow to do so.
Of course he didn’t envision folks carrying the kind of credit card debt that is now common. I still think that it’s valid if you’re flush but have no cash flow to borrow $ for the IRA, provided you are disciplined about paying the debt off. If you have family members with no money, you might be able to borrow from them – that would perhaps go over better than borrowing for something material. You can use FamilyCircle or a similar site to manage such a loan.
This is exactly the information I have been looking for! Thanks!
Sorry, I meant “family members WITH money”. I am a big advocate of parents helping their young adult kids by funding, or at least supplementing, their Roth IRAs, since it rewards work.
Frist of all:Congrats on your excellent blog! I loved reading the archives.
I have kind of a dumb question:all this reading about IRAs and stuff has made me want to look in to saving and investing for the future.The problem is I am not in the U.S. I do have a bank account with a U.S bank though. Can I still start a Roth IRA?
I cannot save in my country´s currency simply because inflation will eat the whole thing so most of the money I make I try to save it in US dollars.
Thanks!
I have a Roth IRA (as well as some taxable accounts) through T. Rowe Price and we set them up online. It was a couple years ago, before their big website re-design, but I’m sure they didn’t eliminate that functionality.
I’d add another question when doing this type of investment research. Is the plan open or closed, meaning can you buy any product or are you limited to the company’s products. For example, if you went with Vanguard for your Roth IRA you might have non-Vangaurd products you are interested in and some companies limit you to their products.
Good stuff JD!
Hey, J.D., I think this is a great couple of articles–if you were interested in adding the particulars of the Vanguard account-opening process, I did a walkthrough here from when I opened my own Roth there.
JR,
Great article. Just a couple of point about Firstrade. They do now offer online signup with their ROTH IRA. You have to fax in a couple of forms signed, but i think this is the case with most places. When I signed up they only required a $50 min deposit.
Once again great article, I will definitely bookmark it and send it out as a reference for my family and friends looking to get started.
I use sharebuider for my all Investment accounts right now. The fees look high, but if you upgrade your plan to advantage ($20/month) your IRA fees are waved and you get 20 trades/month (and each additional trade is just a $1).The fees for real time drops to just $11.95 (all sells are real-time for some reason).
I chose sharebuilder because I can use limited amounts of money (hey, i’m 18 and on minimum wage so that amounts to about $10/week of available cash) and buy fractional shares of almost any stock or ETF.
I have my Roth IRA at T. Rowe Price. I had no problems doing everything online. I never had to fill out any forms and what not.
I’ve got a question here for you sharp folks. 🙂
My wife and I just had our first child a couple of weeks ago so now we’re interested in putting some money aside for college. We’ve decided to not do things like 529’s or other eduction only options but instead just invest the money straight up.
Here’s my question: When considering long term savings goals should we setup totally seperate investment accounts or lump them together to maximize money growth?
For example, say we go with Vanguard. Should I setup an account just for College and then another account just for Retirement and then another for a future House? Or should we lump all those in one investment account (maintaining proper portfolio diversification of course) in order to make the most of interest growth?
Can the term “IRA” include these other types of goals or is that a legal no-no?
You T. Rowe Price people have me back digging through the site. If I find an electronic-only way to open a Roth IRA, I’ll amend this entry.I’ve added info for applying online at T. Rowe Price.One quick thing: I would STRONGLY recommend that you have more than $1,000 in an emergency fund before starting a Roth IRA, ESPECIALLY if you have children. If you have only $1,000 in an emergency fund, Murphy’s Law dictates that the day you fund a Roth IRA will be the day that your car dies and your hot water heater blows up. We have more than $10K in our emergency fund right now and we still don’t think it’s enough (one child, another one on the way) – we are shooting for $30-40K at this point.
I thought you could pull the original money out of the Roth whenever you wanted tax free (since technically you’ve already been taxed on that money). I thought that was like the big benefit of the Roth. So if that’s the case doesn’t this just make a Roth a really awesome savings account?
No…you still have to pay the 10% early withdrawal penalty
Thats not true. As long as your Roth IRA has been open for 5 years you can withdraw your contributions penalty free. The 10% penalty applies when you try to withdraw your contributions before your account is 5 years old or you try and withdraw earnings before 59 1/2.
Rafael: I think that you need at the very least US earnings to open a Roth IRA.
You can usually invest in dollar denominated funds in countries outside the US. You certainly can from the UK. Its reasonably likely that they will be more expensive than investing in the US, and investing in your local currency, partly due to economies of scale.
@Trent
I think this is one of those philosophical differences where each person is going to have to choose what’s right for them. I’m carrying $1,000 emergency fund, paying down my debt, and investing in my IRA. I haven’t run into any problems yet, though I know there is a risk that I might. When my debt is eliminated (still on target for 25 March 2008), I will boost my emergency fund to $5,000, which is where I’ll let it sit. But then I don’t have any kids and my wife and I have a joint $5,000 emergency fund for the house.
I use Fidelity, mainly because my work 401k is also through them. This is exactly the kind of step by step info I could have used in january! I sort of just winged it, but thus far it has been okay.
I’m a little scared to move my IRA to Zecco since I doubt their business model will work. The hassles of changing brokers when they collapse or raise fees just isn’t worth it.
@ Trent
I guess it just depends on how risk averse you are and your life circumstances. I tend to be more risk averse so I like having a good cash cushion in a high yield savings account. $20k right now. But for other’s I’m sure less is fine. $1000 though sounds really low but if you’ve got some other asset you could liquidate quickly I could see investing the rest.
So many options… 🙂
One thing that I think is being overlooked…I’m almost positive you can have more than one Roth ACCOUNT as long as the sum of all accounts falls under the total limit.
Thus, you could use Zecco for buying stocks for your Roth, but if you really liked Vanguard mutual funds (and for some reason wanted to go with those instead of ETFs), then you could have another Roth account at Vanguard.
Hopefully someone can confirm (or deny) this…But as I said, I’m almost positive this is the case.
You can have multiple Roth IRA’s – I know because I’ve done it. Cashed them in for a house downpayment.
I’m at T.Rowe Price as well. For their Index funds you must pay $10/year unless the balance is $10k or greater.
Great article even for someone still learning themself. I’ve noticed a lot of posts to do with IRA lately. You can never post enough. Keep it up!
James nailed it a bit there (w/ shy confirming). Utilize different Roth accounts to trade according to how you feel. E.g., certain brokerages don’t have access to all the funds, ETFs, or individual stock.
but for many people, sticking w/ one brokerage like vanguard and buying a no-load, low fee and low expense fund will be fairly ideal.
@Covert7
Re: Multiple accounts– Like so many things, it depends. If you’re leaving your contributions in cash, you’re more likely to find that your brokerage has multiple tiers of interest rates on aggegrated funds, in which case one big pile is going to yield a higher return. If you’re investing your contributions, they’re going to grow (or shrink) at the same rate regardless, so the only difference is whether there is a tax-advantaged account in which the investments are better held.
I have to make some assumptions on how much you’re able to save, but it sounds to me like you should probably have a Roth for you, a Roth for your wife, and a taxable-savings account (aka regular brokerage investment account) for the rest. Although some companies let you assign sub-accounts (i.e. child-1 college, retirement, future home) without physically subdividing your money, you may need to keep track of those “accounts” yourself using Excel, Quicken, etc.
It should be noted that there are income limits for making Roth contributions–$95k single and $150k married filing jointly. If your adjusted gross income exceeds those amounts, you may not be able to contribute the full amount or at all to a Roth.
See the details here:
http://tinyurl.com/2jw8ab
@ Tinyhands
Thanks for that info Tinyhands. I see what you’re saying here and I think my further questions on the matter are probably better suited to the Forums rather than taking up more space on this post.
Thanks for the help!
anyone have any opinions or used Charles Schwab for their Roth or IRA’s in general?
I noticed you said Pay off credit card debt. Should one pay off credit card debt or do you mean all debt (car, student loans, etc)?
Here is something to consider: Have a Roth, a 401(k), and additional investments, and you want to diversify, which investments should go into the Roth? It would seem to me that the investments which generate income that is taxed at the highest rate should go into the Roth since then that income will never be taxed.
Opinions?
@Moneymonk, You should pay off high APR debt. Assume your ROTH will earn an average 8% APY in the long term, any debt with interest higher than 8% should be paid off before investing in ROTH, any debt with interest lower than 8% such as student loans and so on can wait.
Can I open up more then 1 Roth IRA, say one at ING and another at T Row Price?
re: Sharebuilder I’ve got a Roth account with them and am happy with it, but I find their Gain & Loss reports to be misleading at best. Let me give an example, using nice, round, purely hypothetical numbers:
At the beginning of the year, I buy $100 of stock YYY, paying a commision of $15 (total cost = $115, value of stock = $100) At this point, the gain/loss report will show a loss of $15.
At the end of the year, the stock is still worth $100, but I got dividends of $5/quarter which I had automatically reinvested (nice feature, and there is no commision to do so)
So, I think I’ve paid $100 for the stock, plus the $15 commision and gained $20 in dividends, giving me a value of $120 against a cost of $115, for a $5 profit.
Sharebuilder instead will show me with a fund valued at $120, but with a loss of $35! The report counts the dividend as a cost, not as a gain.
I’ve asked them about this, and they tell me I can edit the history in the gain/loss report to remove the dividend history so that I get the number I expect. I am loathe to do that, because I don’t want to lose that history.
Other than this particular quirk (can somebody with a background in accounting tell me if this is the standard way to do these?), I am quite happy with this account.
Dave
I did have to mail in a Roth IRA application to T. Rowe Price when I opened my sons account, but he was/is a minor 😉
Just a reminder, folks: I’ll be collating your questions on the first three parts of the Roth IRA series, and then doing my best to find answers for them. If you don’t get an answer in this thread, check Get Rich Slowly later next week to see if I’ve managed to find anything out for you…
It should also be noted that yearly maximums for Roth IRA’s are limited to $4,000 for the 2007 tax year and previous years, and will be limited to $5,000 for the 2008 tax year.
This is a good thing to know so that you can have the option of setting up fund transfers (either as a net or percentage from your paycheck, a bank account, etc.) at $333.33 per month for 2007, and $416.66 for 2008, you’ll be sure to hit the maximum by the end of the year.
Income and contribution limits were brought up in previous parts of the article.
To Rance:
I believe you are correct, given that gains are (currently) untaxed in a Roth, it would stand to reason that one might consolidate both their tax-disadvantaged investments as well as any shorter-term/riskier investments that they hope will do quite well. In this way, you should be minimizing taxation.
I’m really surprised nobody has mentioned Scottrade yet. (Unless Scottrade is an established loser?) I opened a Roth IRA with them in January. They only required a $500 minimum initial investment, and I haven’t paid any fees so far. If you buy into one of their approved no-load, no-fee mutual funds, the transaction is free. And they have tons of funds to choose from.
Downsides are you can’t electronically transfer my money in, and if you don’t buy a no-load, no-fee fund, the transaction fee is something like $34. But I use the online bill pay feature at my bank to send the check every month, and I don’t plan on buying into a fund with loads and fees. So I’m pretty stoked about a no-fee IRA. It works for me.
Re: Emergency fund first: You can take out the amount invested from your ROTH without a penalty, for any reason, right? (I know you can take out like $10k for a house, but I’m pretty sure you can extract your cash deposits too…)
If this is so, is there any reason someone like JD (who wants to do a ROTH *now* before building up a Trent-size emergency fund) couldn’t use this as an extended emergency fund if his initial fund runs dry? If you can do this, then it seems like the ROTH vs emergency fund doesn’t have much weight beyond the 5% the e-fund would get in online savings.
Ryan,
You can take $10,000 out to buy your first house with no penalties, or to continue your education. If you’re under 59 1/2 you’ll pay a penalty (up to 10% I think) for any other uses.
The advantage of a Roth over a Traditional IRA is that you’ve already paid taxes on the money you’re putting in, and anything you earn in a Roth won’t be taxed, but if you pull it out before 59 1/2 you’ll be penalized (10%) and the penalty is the same for a Traditional IRA. With a Traditional IRA you take pre tax dollars and place it in the IRA, when you take it out (before or after 59 1/2) you’ll pay taxes on it.
Lets say your tax margin is 15%.
To invest in an Roth IRA, you’d pay the 15% before investing.
Example(Roth):
You earn $100, your tax would be $15, thus leaving you with $85 to invest in. Lets now say you invest this amount once a month for a total of $1020. Doing this at 5% interest compounded monthly you’d earn over 20 years about $35,083.44
Example #2(Traditional):
You earn $100, since you’re investing(all of it) in a Traditional IRA all of that money would go right into your IRA. Lets factor everything in like last time, earn 5% compounded monthly over 20 years would fetch you $41,274. Sounds great, doesn’t it? Well, you have yet to pay any taxes on that amount.
You can expect to pay about $6983* in taxes, that is if you took it out all at once, thus leaving you with $34291. A little shy of $1000 less then the Roth IRA.
*I used a 2005 tax table based upon a single person’s income. Found here:
http://www.fairmark.com/begin/bracket.htm
Here are some good places to start learning about IRAs.
http://www.irs.gov/retirement/article/0,,id=111413,00.html
http://en.wikipedia.org/wiki/Individual_Retirement_Account
http://www.fool.com/money/allaboutiras/allaboutiras.htm
Take Care, and take control of your money!
Adam B.
While your example is correct its a little misleading. You are 100% correct if you are pulling out “ALL” of your money in one lump sum. However most people and financial advisers suggest not doing that and the general rule of thumb is to take out 4% per year. Taking out 4% of $41,274 is about $1,650 a year which would qualify you for the 10% tax bracket. So if you were truly using this like a normal account, it would make more sense in this particular example to invest pre-tax instead of putting it in a ROTH.
To correct an error, I meant “Tax bracket” instead of “tax margin”
@ Ryan:
You are correct about the house withdrawal, but that’s it:
-Earnings withdrawals become automatically qualified in the tax year the participant reaches age 59.5 or becomes disabled, so long as the account is “seasoned” (established for five or more years).
-Up to $10,000 in earnings withdrawals are considered qualified if the money is used to acquire a principal residence. This house must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives the “first time homeowner” distribution must not have owned a home in the previous 24 months.
Via http://en.wikipedia.org/wiki/Roth_IRA
JD:
Sorry I didn’t get you the information you asked for — I’ve been keeping crazy-long hours.
BTW, I too set up everything for TRowe Price online and it was as smooth as butter. Their online interface to manage the account is nice too — I can automatically change my contributions, open other accounts, etc.
DB
Ryan, Adam, Waylon —
It is my understanding that at any time, an account holder can withdraw up to the total of his contribution from a Roth IRA with no penalty. In other words, Ryan’s suggestion that a Roth IRA might be used as an emergency fund does hold true. Now I may be wrong on this, but I don’t think that I am. I’ll get verfication this evening.
This is not exactly true.
I have put 5500 in a roth IRA 5 years ago at Fidelity. Fidelity did not actually put it in a roth IRA so it did not get any interest, even though I did it automatically via Fidelity to go to a classic Roth IRA. Now i just looked at that account and saw Fidelity has just let my money sit in their account, with no warning, nothing, calling it a Roth IRA…but with no interest for me.
I asked then to withdraw the money since it does not gain any interest. They tell me I need to pay a fee of 50$! So basically I have put 5500$ 5 years ago, now this Roth IRA money Fidelity made it a 5450! What a nice loss after all these years. Of course Fidelity stay put and refuses to not make me pay the 50$ withdrawing fee.
I have my 401k there as well, and my plan is to close everything. It is infuriating to loose so much money with a Roth IRA!
If you are going to choose mutual funds for your IRA’s, don’t forget to take into account the expense ratios for the funds. Some companies considerably higher ratios than others. Vanguard has a good expense ratio calculator on their site to compare funds btw companies.
JD — that’s my understanding too.
The argument *against* using a Roth as an emergency fund is that once you’ve withdrawn funds from a Roth, you *can’t* put them back. The risk is that if you tap your Roth, you make a permanent hole in your retirement savings. And emergency funds do have a habit of occasionally being needed…
Also consider that you really need your emergency fund to be relatively stable; while a retirement fund, with its very long timescale, can take more risk and so have more volatility. What if you need your emergency fund in the middle of a stock market slump?
If you’re just starting out and are faced with a choice between emergency fund or Roth, starting a Roth with the understanding that you might tap it in an emergency is worth considering. But given their very different purposes, it’s much better to keep them separate. (I view funds that go into my Roth as entirely inviolate: once they go in I don’t plan to see them again until retirement.)
And I’ll add a nod for Vanguard, as long as you can afford an initial investment big enough for the fund you want into ($1000 for STAR, $3000 for Target Retirement funds) — I’ve been very happy with them, and the automatic $333.33 debit from checking wors very well for me.
Excellent Site. My father in law recently passed away at the age of 52 from a Brain Tumor (hope you never have to deal with one of those in your life!) and my mother in law is pretty uneducated in finances. I’ve been helping her roll over his 401k into an IRA and appreciate your posts on various companies.
I’m making some $ through online surveys these days after a few hours on the computer and am planning on taking those earnings and place them into an IRA as well, thanks to your advice!
http://deathtodebt.blogspot.com
-Rex
Does anyone know if it’s possible to roll a 401k into a Roth IRA?
I was just looking into this the other day, having $1,000 in a traditional IRA from an early-on and short-lived job. Looks like to transfer it into a Roth, the amount will get added to your income for taxes and you’ll have to pay the income taxes on it. I believe you can also spread that tax burden over the next 2 years (like $500 added to my 2016 income, $500 to 2017)
Covert7 — One technique you can use for financing college is to save that money in your (and spouse’s) Roth IRAs. The contributions can be withdrawn without penalty, and the growth will still be there for retirement. Of course, if you can afford to save more than $4000/yr/person, you’ll need to look at other investment vehicles. Be sure to compare your state’s 529 plan with the Coverdell ESA (formerly Education IRA). My understanding of college financial aid is that they take everything in the student’s name, but only a part of what’s in the parents’ names.
As far as Roth IRA companies, I’ve been pleased with Fidelity. Their website is imperfect (but still quite usable), and their trading fees are high, but regular stock trades in a retirement account are a no-no anyway. Used to use T. Rowe Price. Also good, but maintenance fees were higher.
Hello, just found this site thru a link from LifeHacker. I’d say the article is very through and well-written, but I have some serious concerns about some of the statements and implicit assumptions in the comments. Please forgive me for some of the harsh comments below. Here are my thoughts:
1. Roth IRA v. Traditional (deductible) IRA v. 401(k).
I didn’t see anyone mention this, but one of the best retirement savings vehicles in the 401(k) (or 403(b)), if your employer sponsors one. The advantages of contributing to a 401(k) is the higher limit ($15,000/yr v. $4,000/yr), and most employers automatically match your contributions, so it’s free money (or an instant investment gain on your contributions). You can also contribute to a Roth IRA if you participate in a 401(k)/403(b).
Assuming you don’t have a 401(k)/403(b), the question is whether to use a Roth IRA or a traditional IRA, where the Traditional IRA will provide you a tax deduction in the current year.
BTW, with the exception of a 401(k) that has an employer match, I’d pay off high interest debt before starting an IRA. Your returns in the IRA will be swamped by the 12%+ interest rates on your credit cards, etc.
2. Borrowing money
Someone mentioned borrowing money to fund your retirement. Unless you receive a 0% loan, this makes no sense, since any earning in your retirement fund(s) will be eaten by the interest paid on the loan. Plus, if it’s a Roth IRA, you didn’t get any immediate tax benefit either.
3. Sharebuilder
I probably in the minority with this view, but I think buying individual securities/ETFs is a stupid idea for smaller (
(cont. sorry posting problems)
3. Sharebuilder
I probably in the minority with this view, but I think buying individual securities/ETFs is a stupid idea for smaller (less than $75,000) accounts. I’ll use Sharebuilder since it was mentioned in the comments. Paying $20/month = $240/year in fees!!!! Let’s assuming you’ve been contributing to your IRA for a few years, and the balance is $10,000. Your “expense ratio” for this account is a whopping 2.4%!!! You’re basically down 2.4% for the year before you’ve even started investing!! This expense ratio is worse than the worst mutual funds. And for those thinking, “Well, I trade a lot, so it’s worth it,” studies have shown that these people end up with smaller gains than those who buy diversified mutual funds and hold them for a period of time! Also, most people will either (1) forgot/get bored of trading, and will end up with crappy securities in their portfolio; (2) with such small accounts, will be highly concentrated in a few companies; (3) won’t have the stomach for significant stock price swings, and will end up selling at the worst time (again, there was a study on this).
I think for smaller accounts, one should stick with low-cost, diversified mutual funds.
4. The ING Roth IRA
I think the ING Roth IRA is a terrible recommendation. True, they have a low initial investment of $250 vs. $1,000 or more at Vanguard, T.Rowe, Fidelity, but the expense ratio (what you pay indirectly every month to the mutual fund) are exorbitantly high. Take for example, their balanced fund — expense ratio of 1.40% — it’s seven times (700%) more expensive the cost of the equivalent Vanguard fund at 0.20%. 700%!! People you pay this indirectly, and the more money you have in the fund, the more you pay! And you pay this every year (month) for as long as you invest in those funds. Remember, the ING fund has to perform significantly better than the Vanguard fund due to the drag of the expenses. Generally, if you are starting out in investing, pick low-cost, diversified funds from Fidelity, T.Rowe, or Vanguard. If you can’t meet the initial investment amount, save cash in a high-yield savings account until you accumulate enough to start your IRA, or use the monthly investment options. The Vanguard STAR mutual fund, for example, has a $1,000 minimum, and it a very diversified fund. Also, some MF companies will waive annual fees if you agree to receive electronic statements.
5. Investments in IRAs
There was some discussion about using IRAs/401(k)s/403(b)s to shelter certain types of investments, specifically those that throw off significant dividends or short-term capital gains. I think this is a great strategy if you have significant holdings outside of your tax-sheltered accounts. (Of course, don’t ever put Municipal bond funds in a tax sheltered account)! However, for those with less complex portfolios, this point is moot. Buy low-cost, diversified mutual funds in your IRA.
6. Savings / Emergency Cash
Everyone made great points on building a emergency reserve. This is so critical, since this will keep you out of credit card debt if any unforeseen events occur. Getting into CC debt is one of the worst wealth destroyers out there. Since this is emergency cash, don’t put it in an IRA!!! You’ll end up paying significant penalties if you withdraw from an IRA before retirement age. Instead, place your cash in a high yield FDIC-insured savings account. My favorites are EmigrantDirect ; HSBCdirect ; INGdirect.
Investing is a passion for me, and I hope it will become the same for all of you. Please be sure to do your own research before investing. I don’t work for any of the companies I mentioned above. I do invest with one of them. Thanks for reading!
This post comes at a great time for me as I’m currently in the process of establishing my own Roth.
Thank you for compiling this information, JD!
=^..^=
Great post. I’ve already got a Roth set up, but this is useful information to pass on.
SecularSage:
what I recall from the paper work I recently filled out to transfer an IRA from one institution to another was that if you wanted to transfer a 401k to a ROTH, you first had to move it to a “regular” IRA, and then do the conversion to Roth as a second step. (BTW, this was at Vanguard.)
@Driver8: I’ll use Sharebuilder since it was mentioned in the comments. Paying $20/month = $240/year in fees!!!! Let’s assuming you’ve been contributing to your IRA for a few years, and the balance is $10,000. Your “expense ratio” for this account is a whopping 2.4%!!!
Alternatively, on Jared Teem’s “$10/week of available cash”, a $20/month fee amounts to a nearly 50% sales load.
I believe JD in # 45 is correct. Roth contributions can be withdrawn without penalty. I am pretty sure if there are any penalties, it would only apply to earnings, not contributions.
#40,
I pretty much agree. At least I don’t think a very large Emergency Fund makes any sense. J.D’s $1000 seems reasonable. People wanting to have $20,000+ Emergency Funds make no sense to me unless they have really high living expenses. For someone with modest expenses and modest retirement funds, it seems a waste to have a large sum of money sitting around not doing anything. Especially in my case where I plan to have 40+ years of time to buildup my retirement funds.
I don’t know if I am mathematically correct( i think so, but not sure)..but for the people who like to talk about the mental/emotional element of investing- to ME retirement investing is more important than both an Emergency Fund AND Being Debt Free. I think one can tackle all at the same time, but I’ll take Retirement first.
I feel like if I dont invest $4000 this year, that a huge missed opportunity I can’t get back. If I use a Retirement calculator and see what that $4000 might be 30-40 years from now and how much difference missing 1 year can make…ouch.
Emergencies- Being Frugal kinda IS an Emergency Fund for me. At any point I feel like I can make enough money to get by somehow. I have low enough expenses, for example, if I had to find a job I wouldn’t have to be picky. I could probably sell enough stuff on ebay to live for several months,etc. I guess as long as I am insured against catastrophies as best I can, I have the emergencies covered.
Debt Payoff- Well I don’t feel that bad if I have to carry a small amount of debt. Maybe this is emotional- but I see retirement as Compounding, and Debt as getting paid off regardless of what I do ( as long as I dont add to it). In other words, I think investing $4000 towards retirement will return much more than paying off $4,000 in debt. If I have debt ( I Don’t have any revolving personal debt, FWIW) and I am already budgeting to pay it off, its getting paid off-especially if I can maintain the same payment or inrease it as finances allow. Of course I don’t WANT to be in debt, but it’s not as emotional to me. Plus I think debt can be a short term help in case of emergency ( and possibly cheaper in some ways than cash sitting around). For example, I’d rather charge things than starve, have utlities cutoff ( and incur late fees and reconnect charges,etc), etc. If it’s short term its cheap anyway.
Maybe i’m just insane, but if I maxed out my Roth today and then found myself with no money tomorrow ( or only $1000 and a bunch of credit cards), I would still be glad I funded my retirement.
Where is this $20/month for Sharebuilder thing coming from? I’m confused.
On the Sharebuilder site I see something called Advantage for $20/mo but also a Free basic ( with $4 per trade).
sharebuilder dot com/sharebuilder/Fees/Default.aspx
I have heard of Sharebuilder,but am not that familiar with it. I have only used typical discount e-brokerages and bought full shares or no fee Index Funds with automatic reinvestment,etc.
Greg C. — I think, from what I’ve read, that the amount of money someone wants to have in their emergency fund depends somewhat on how many categories of “savings” that person has. I’m working on saving up an emergency fund, as well as setting aside a little money each month for other purposes. This includes a budget for car maintenance. That way, if I have an expensive repair, I can pay for it, without having to build up a huge emergency fund. But if I were to only be saving up an emergency fund and money for investments/retirement, then the emergency fund would have to be bigger, because it would have to cover more *kinds* of emergencies: medical emergencies, a break-in at home, car emergencies, travel emergencies. I think it depends on what constitutes an emergency for different kinds of lifestyles.
If you want Vanguard and their low fees in a Roth but can’t afford the $3k min for most funds, pick the STAR Fund. It only has a $1,000 minimum and is a very diversified (20-30% bonds) and well allocated (has growth, value, large, small, and international coverage) fund of funds. You can’t beat getting a piece of those 11 different funds for the price.
The expense ratio is only about 0.35% with no load. The 15 year annualized return* on that is 10.38% with a standard deviation of 0.096. I dare you to find something that beats that return with a risk that low.
*Past performance blah blah blah
I love Vanguard and love that my Roth IRA is with Banc of America Investments. Let me tell you why.
First I started my Roth IRA nearly 5-years agio with $50. Thats right, $50. Now I couldn’t buy into a Vanguard Mutual fund then, but at least I could START the process with only $50. That is sweet. The money simply sat in a money market account making probably 4% until I gathered up the rest.
Now here is where the deal sweetends even more. Through Banc of America Investements, I am allowed to buy a mutual fund to start with ONLY, get this…..$1000. That’s right, Banc of America and Vanguard must have some deal worked out where this is allowed. I was able to purchase Global Equity with only $1000, Small-Cap Value for only $1000 and so on. The additonal investments were in increments of $250. This REALLY helped me get my feet of the ground with growth from the start as I was investing in far better funds than the standard ‘Star’ fund.
On to Sharebuilder. I don’t have a Roth there, but a freind does and I have a brokerage account there. Where they get you is if you want to purchase stocks at anytime YOU want to. They charge $15.99 a trade, but if you simply allow them to purchase your funds/ETF/Stocks on Tuesdays, they will do so for $4. Now here’s the trick and catch, the first part already eliminates folks with that structure, but where they trap folks is when you buy $25 in an ETF and pay a commission of $4. Folks with Sharebuilder accounts have the option of purchasing stocks at very small amounts, but we have to be smarter than that and at MINIMUM only buy stocks above $150 to get that up front sales fee low.
Again, I got a sweet deal with that Roth IRA and I am unsure if anyone else has this same situation. And I do have a good chunck of my money with Bank of America, so I am not sure if that helps with me being allowed to purchase ALL of Vanguard funds starting at $1000.
Luke:
1) Vanguard raised their minimum from $1k to $3k two years ago. The STAR fund is still $1k. Has nothing to do with BoA.
2) The STAR fund has coverage of those “better funds” asset classes you mentioned and then some. Plus it is well diversified.
3) Its a lot less risky to build your portfolio with the STAR rather than adding high risk asset classes 1 at a time. And unless you’re lucky, you’ll get a better return. Don’t believe me? Read more here: http://www.efficientfrontier.com/
4) Once you build the Roth account to a critical mass of $30k then you can look at getting as fancy or simple as you want with allocation. See example here: http://www.fundadvice.com/
Just one idiot’s opinion.
I hear ya about your approach, but I am still allowed today to purchase a NEW Vanguard Mutual fund other than the ‘Star’ with only a $1000 minimum. That MUST have something to do with my connection with Bank of America, no?
You go to Vangaurd and it will cost you $3000 to open up th Target Retirement 2035, but I can do it with $1000 through Banc of America Investments. The barrier to entering a “high risk asset” as you call Global Equity I assume, is only $1000 for me and $3000 if you do so through Vanguard itself. Having the ability to start any fund with Vanguard for $1000 is far better than your option of having to start a Vanguard fund with $3000. I guess that was my point.
As far as the ‘Star’ fund, that is only 60% in stocks and I am far to young to be playing the slow growth game. Yeah it has a good balance, but 25% in bonds? There are far better funds than Star from Vangaurd.
@Luke:
Are you sure BofA isn’t charging a sales fee? I went to their site, and Vanguard funds aren’t listed in the No Transaction Fee table. For non-NTF no-loads, it shows a $45 fee:
https://www.baisidirect.com/Static/SelfDirected/Commissions/commissions.html
Just curious…
Hey Driver8…
I can assure that when I buy 100 shares of a Vanguard fund at $10, for example, to begin my position, I have never been charged $45 or even $10 or ANY fee. Like I said, I have been able to get into Vangaurd funds for a few years now for $1000 and NO sales fee or back end fee.
What’s missing from your post are any of the “socially responsible” funds like Calvert. For those of us trying to avoid those who invest in say, companies benefiting from the genocide in Sudan, that’s important. For example, Fidelity right now is under fire for its investments in Petrochina, which in turn is making money from investments in Sudan, which in turn is using that money to fund the genocide in Darfur.
I’m not trying to push others to get out of Fidelity or Berkshire Hathaway (another Petrochina investor), but for those of us not wanting to get “in,” options like Calvert would be nice.
Thanks for an otherwise great post!
JD–
This is a great article, with one exception: Please take out the recommendation for the ING IRAs.
I love ING. I use them for savings, checking, and CDs now. Their web site and customer service are excellent. However, their IRAs are stupidly expensive and don’t perform well enough to make up for that. The beginner is much better off putting money in an ING savings account or CD until they reach a discount broker’s minimum.
Someone who’s more used to this stuff might decide they like an ING fund enough to invest in, but given their high expenses I really think you need to know more to make a good decision. ING funds are not a slam-dunk the way a broad index is.
Sharebuilder is way too expensive, *especially* for beginners whom it panders towards. First of all, their website is sub-par. In order to sign in successfully, you must go to their website, click on their logo, THEN log in, otherwise you will be greeted with an IIS server error message. Yes, this is the official remedy, I emailed them about this. The programming/backend on the rest of their site is also not confidence inspiring, I won’t go into more detail.
Second, if you are trying to trade EFTs and mutual funds, do yourself a favor and invest in index funds with low expense ratios and low turnover. Vanguard offers some very nice choices. The key to average-joe investing is to buy the market and hold forever. Very few EFTs and mutual funds beat the market consistently year after year, and then there are the expense ratios and buy/sell fees you pay to the broker.
Unless it is your profession, leave active trading and hand-picking stocks to the day traders (the VAST majority of whom lose money and go home/quit, btw). Educating yourself to manage risk well enough to beat the market is a full-time job. For the vast majority of the public, go the no-fee/low expense ratio index fund route. For more info, google “expense ratio” and read “Common Sense Investing” by John C Bogle, founder and ex-CEO of Vanguard.
Hi,
I will be opening a IRA but I am confused about the amount of mutual funds the bank offers (in the particular account). For example, ING Direct offers six funds to choose from, and other banks offer only 5. What is the differnece? Should I consider the one with 6 mutual funds to invest with or is it important?????????
Also, my parents are 52years old and they want to open an IRA, should they go for the ROTH IRA or the traditional IRA? They have a steady income every month and own their business, what should they do?
I use Fidelity for my IRA, but not a Roth. I have a traditional IRA. Before you decide which way to go, check out some of the online calculators. Based on one’s age, income, when one starts contributions, and when one plans to retire makes a BIG difference on which IRA to use. For me, a traditional IRA makes more since, mainly due to starting late, and present tax situations. (assuming taxes will be lower when I retire….Don’t shoot me, I know what ASSUME means).
If you have a qualified roll-over, you can use it instead of a minimum deposit or monthly contribution. I rolled my 401k and have no issues. I linked my Fidelity account to a Capital One savings account where I have money transferred each payday. When I wish, I can transfer a chunk to the Fidelity IRA and then invest the cash any way I wish.
I choose not to make automatic contributions to “average buy” any stock, bond, bill, or fund, because I feel I can do better and have. In the last 12 months, I have realized a return of over 31% by buying a Fidelity fund wisely….when the fund is right to buy, not when it’s average to buy. While I might not be so lucky in the future, I have about 23 more years to get it right…..I think my investments have a chance of making more in that time frame.
I’m a college student working for the summer and will make about $5000 before taxes at an internship this summer. Thankfully my dad pays for my tuition but I was just wondering if this makes me ineligible to open a roth ira or not?
I have $18K “sitting” in a 401K account from a previous employer. I want to roll over into an IRA and possibly a Roth IRA. I am also interested in high interest savings accounts that I read about on this site. Not sure of the requirements. I am 40 yrs. old and getting a late start in savings/retirement planning. (I do have a retirement plan with current employer.) What are your suggestions?
I have a severely underperforming roth ira of 4 years (my more recent funds are doing much better). I want to sell it and open up with another fund. Any taxes/fees/etc. involved in that move? Any literature about it?
Don’t underestimate the importance of large emergency funds (ideally 6 months wages if you have just started a family).
My job didn’t take me back F/T after my maternity leave (long story) and it took me almost a year to get a F/T job while I had a new baby to take care of…If that wasn’t hard enough, my husband was laid off when my son was only 4 months old.
We ended up 10’s of thousands (more) in debt. Take heed and prepare. We had entered all this already with a new mortgage, my student loan debt, and home improvement debt accrued when we got the house and needed to get appliances, furniture, new floors/carpet, and then later baby expenditures.
Worse possible time to lose your income…After 2 years of already accruing family-home setup debt. Hind-site is 20-20.
I have read each and every one of these comments and I think everyone has great advice. My situation is the following:
I’m 23 years old, my husband is 30, he has three children from a previous marriage and the youngest won’t turn 18 until 2020. We own a home and have no credit card debt. We do have a $1200 mortgage payment,$140 HELOC payment and $900 combined car payments. We make about 72K before taxes and realize that we need to start an IRA very soon. The problem is that we don’t just want to start one for the sake of staring it and don’t diversify our portfolio correctly. We can definitely do automatic payments of $200 monthly but need a realistic goal of how to manage the account because we don’t want money just “sitting” there as some people have mentioned. We are also full time college students and strapped for cash. Please advise.
i don’t believe usaa has any fees, and $250 is th eminimum investment
I’m a little younger and originally set up a traditional IRA, but have been advised to set up a Roth IRA in addition. Is it safe to set up a traditional and Roth IRA with the same company (currently with Fidelity) or should I do with two different ones just in case something would happen to Fidelity. Thanks!!
I am ordinarily resident in the UK, but domiciled in the US. All of my earned income is in the UK (I pay UK income tax and declare my UK earnings on my US income tax form). I have some small income from investments and may in the future have rental income from a US property. Can anyone out there tell me whether I am eligible at all for an IRA or Roth IRA? Does rental income count as ‘earned’ or ‘unearned’ income? Thanks! Thanks also for the interesting reading on the subject.
Trying to decide on Roth IRA, or regular IRA.
On a regular IRA, if you put in approx. $75, Uncle Sam puts in $25. (That’s about 25% of the total: $100.
Both Your $75 and Uncle Sam’s $25 gains interest for multiple years till you retire.
I don’t understand why a Roth IRA is better.
You are gaining interest on Money you would have paid to Uncle Sam.
I just don’t get it.
Thanks for the info in your site. I’m just starting to get serious about my finances, and since my occupation typically doesn’t have benefits and retirement plans, and since I’m starting a bit late in life (36 y.o.), it is easy to feel overwhelmed, and to procrastinate even more. I like how you break things down to the basics, using yourself as an example to share the decision making process.
Now I feel that I CAN take charge of my money and retirement savings, and I’m taking baby steps already!
Jared Teems – wow, I’m so impressed. I’m guessing you are a college student? The fact that you are only 18 and making minimum wage, inspires me that if you can invest in retirement, then I can too! Sounds like you have a good head on your shoulders, and will do well in life. I only wish I had started at your age!
Zecco actually charges $10 for mutual fund trades, whereas the first 10 ETF trades would be free.
TDAmeritrade’s Izone is a lot cheaper if you’re buying mostly mutual funds and they also dont’ have annual maintenance fees for retirement accounts.
Has anyone looked at opening an IRA with or had any previous experience with Janus? I’m considering opening a Roth IRA with them but was wondering if anyone here had any comments about them. Their website says that a person can open an Roth IRA with a $1,000 minimum initial investment; $500 minimum if you sign up for a $100 or more monthly automatic investment plan. As far as fees, their website says, “Janus does not currently charge any custodial account fees for opening or maintaining your Roth IRA.”
Link:
https://ww4.janus.com/Janus/Retail/StaticPage?jsp=jsp/Account/TypesOfAccounts/RothIRAAccountType.jsp
This is the best Roth IRA for dummies info I have read so far. There are a gazillion websites where you can read about IRA’s including irs.gov, but they’re all so confusing and not explained very well! This one is simple and explains step by step how to open an IRA. THANK YOU VERY MUCH=)
Lisa, my only recommendation would be to look at a few other companies before you take the plunge. Janus is a decent mutual fund company and I assume that is the reason why you would want your Roth IRA with them, but there are other options out there like Fidelity and Vanguard that have lower cost options. Just make sure you have due diligence before you take the plunge.
Is there such a thing as a Roth IRA “savings” account that gets rates comparable to a good “regular” savings accounts (5% APR or higher)? Is there a reason this is so difficult to find information on (at least for me)? It seems like any place that I want to take my Roth IRA to will require me to invest in mutual funds. It is currently in a savings account at Wells Fargo making somewhere around 1%, which I know sucks. I’m just wondering why there are so many savings accounts advertised everywhere giving (relatively) good interest rates but none that I can find for a Roth IRA.
Brent – don’t know about other alternatives, but Sharebuilder has a money market fund that is currently earning 4.35% (7 day yield, as of 5 Nov) I would think that most accounts have a similar option.
I really appreciate your article. I have found out what a Roth IRA is on other sites but amazingly could not find out how/where exactly to get one until i came to your site! I am relatively young, I’ve never made a lot of money. I’m pretty clueless about investing, but I’m trying to change that. I think this is good for me to start saving for retirement.
Can you tell me if there is anyway to control where the money goes? I’m trying to understand if money I invest in Roth IRA contributes to mutual funds. If so, do I have a choice in which companies are in the mutual fund? I want to avoid funding companies I may be ethically against.
Hi, I was doing some research on retirement plans. I came across this article and it was the catalyst I was looking for to make my decision. I went with Fidelity (Roth IRA). The financial advisor was extremely helpful and answered all of my novice questions. I’m 23 and I feel great about having a retirement plan. Thank you for your help. Now, I’m an avid reader.
Do any of “The Big Three” allow you to purchase QQQQ, SPY, or ETFs?
This is a great article. I want to open a Roth IRA soon and had no idea where. After researching for a while, I have decided I want to go with either Fidelity’s or Vanguard’s plans where you pick a retirement year and leave the investing up to them. From what I have read, this is a good way to earn good interest without the worry that goes along with maintaining the account. I want my money to grow, but I don’t want to think about it until I retire. I am 22 right now and want to get my $4000 in for 2007 before the deadline. I have very little expenses right now and have a small emergency savings ($2000, but I will add to that as well), and have paid off all of my debt.
Can anyone give me a good comparison of these specific services offered by Fidelity and Vanguard to help me decide? Also, I am already investing 5% plus 4% match to a 401k, and I will eventually contribute the max to that as well. I plan on tapping that out before using the Roth, so I am not sure what year I should use for the Roth, I was thinking maybe 2055, which would put me around 70. I want a more aggressive approach than standard, is this a good way to achieve that?
http://bxcapricorn.wordpress.com/2007/02/25/roth-ira-review/
for what it’s worth.
Does anybody have any experience with Ameritrade Roth IRA?
I have an employer-sponsored 403(b) plan with Fidelity. I am funding it at $4,500 per year, out of the $7,500 maximum allowed.
Would it be wise for me to deposit, say, $200 per month into a Roth IRA? Or would I be better off to direct those funds into my 403(b) instead?
I have my Roth with a company that charges $200 just to purchase stocks. Besides a mutual fund that I purchased to start my Roth. I have added two ETF’s in my Roth this year, QQQQ & SPY. That’s when I found out about their policy on stocks.
I am looking into adding EFA. I pretty much tell my broker what to do, I don’t need help or guidance in choosing stocks.
I am looking to move my Roth to a low if not no commission per trade company that has local offices in Southwestern CT where I can get help if needed with account problems and gives me online control of my account. I plan to go long on my Roth investments and don’t mind paying a yearly maintenance fee by check, I’m paying $35 a year right now.
Schwab and Vanguard are across the street from each other near me. Zecco.com looks promising but they don’t have local, offices do they?
$200 to purchase stocks? Holy cow.
Matt you can put $15,500 this year into your 403b.
With that said, I like the approach of having a 403b AND a Roth. Fidelity is a quality company and all, but I bet you have only 12-15, high expense ratio funds to chose from. So open an account at Vanguard, Fidelity [better choices from them outside the 403b) or even a Bank of America or Sharebuilder. You can then go after index and lower cost mutual funds or even stocks if you do your homework. You have much better options outside the 403b and opening a Roth could also help you with a first time home purchase up to $10K and you can also remove contributions without penalty, NOT that you want to do that, but if you are head strong, it’s nice to know you wont have to jump through hoops if something BIG came up.
You could also tackle buying ETF’s inside the Roth, just make sure you get $500+ into a fund if they charge $7 a trade. Don’t get stuck into buying $100 blocks of something and paying basically a 7% commission every time.
I am currently in the military and I am stationed in Japan. I have a truck payment of roughly 450.00 dollars and a credit card debt of 4500.00 dollars. Both will be paid off in two years or less. My wife is also in the military so our paycheck is roughly above 4,000.00 a month. What agency do you recommend for a Roth IRA for us, because that is our only debt are those two things we live in free housing and everything. I would greatly appreciate someones time.
I’m 55 ,married and always let my husband do the saving. I put my little bits of money that I earned into savings/checking and CD’s. I now want to invest in something more lucrative/aggressive. I also want to diversify. I am looking into Roth IRA’s. (I only know the basics). I was told by an aquaintance, to look into municipal funds. I don’t know what any of this stuff really is, but am willing to learn.I have @15,000 to invest and I’m not sure where to go. Again I would like to diversify, going beyond what I just mentioned. I even need to change my checking acct because the rates are so bad.Federal fund rates just went down today .I know this won’t help me.I am a beginner, but because of my age, I ‘m wondering if I should not invest like a beginner. (I’ve heard a lot of good things about the Vanguaard Star Mutual Funds). Should I invest in something like that and something more aggressive? I am also interested in socially conscious stuff. I really believe that the wave of the future would be environmental stuff but don’t have a clue how to do that. I also work part time and can contribute monthly if need be.
ofcourse ING charges fees—they are in the business of making money they wont do it for $10 and no other fees as stated in the article. there are hidden fees with many investments. Have you checked the prospectus.
The more you know and then apply the better off one is. I love the roth ira if you can do one. I hope to make too much money this year to qualify.
most people make mistakes by thinking they know the rules when they do not
I’m in my mid-twenties and want to open a Roth IRA but given the stock market’s horrible performance lately, would you guys recommend opening an account a few months from now? I’d hate to open an account and watch its value immediately go down. Any advice would be much appreciated!
my normal tax bracket is 18%…
this year it will be 28%…
question is would i be better off putting more in my traditional 401k and IRA and let it ride until i am back down to my normal tax bracket and then convert it over to a roth thus paying on the money at my lower tax bracket.
I just opened a Roth with Fidelity using automatic $200 deposits. Am I correct in my understanding that my initial contributions will be held in a money market account until I have accumulated the $2500 needed to make an initial mutual fund purchase?
I did it!
I opened my Roth with Vanguard this morning. The array of Vanguard index funds makes me drool and I am so excited to begin my investing life with them!
I’m aggressively paying down my car loan so my monthly contribution is pretty puny but I can’t wait to max that sucker out!
to reply to Maggie: Municipal Bond Funds are of interest primarily if you need tax relief. The dividends tend to be small, not unlike savings accounts, but not taxed (I don’t know if they are figured for AMTs or not.)
If you’re concerned about “aggressive” vs “conservative” investing, you first need a picture of what you have, what you need, and then you can think about splitting your investments into the different strategies. Do NOT tell a broker you want to pursue aggressive strategies, that’s his cue to put you in high-risk speculative investments. Depending on the amount you have to invest, you might want to talk to a financial planner whom you pay, not an agent for a company.
Rob, open one now. When the market is down the market is cheap. Now is the time to buy. When you are young a down market is good.
I have my Roth IRA at Vanguard, my wife’s Roth IRA is at T Rowe Price. I like the lower cost index funds at Vanguard a little better, but could recommend either of these companies.
I am 61 and have 4000 in the bank after all of those years. I work in the domestics and have not ever learned how to save. I have now started. I have a job that pays 65K and it might not be for a full year. she is 94 and could die tomorrow. then I have to spend what I saved waiting for the agency to get me another position. all positions were like that.
can I do a roth IRA? I want to retire at the age of 67. I then can have a part time job and still collect my total SS I am scared to invest because I have always needed my money.
Hi JD,
Great blog post. I’m 23 and make around $65k a year. I’m thinking about starting an IRA now because I have a lot of extra cash, even though I am still paying back student loans and have a $10k car loan for my M3. Do you think it is smart to invest in my retirement now or wait until I pay off my loan debt?
Also, I am getting about $2k back in taxes, and was thinking about putting that in a Roth IRA. I heard it is smart to do that every year with your tax return. Just wanted to know your thoughts. Thanks,
Cody
@Cody:
Start saving now! Even if you have debt, you should save some. I heard that you cannot use your tax refund to fund a Roth IRA because Roth IRAs are required to be funded by wage income only. But, considering how a tax refund is money you paid based on wages, I suppose it would fit in this category. Best to consult a tax professional or call one of the investment houses who handle these things.
Cody, definitely open a Roth IRA. If your employer offers a 401(k) or 403(b) account, fund that enough to get the employer match (if any), and maybe more. It will reduce your taxible income.
It would also be a good idea to open a Roth IRA now, because once you’re earning $99,000 or more per year, the amount you’re allowed to contribute tapers off and approaches zero. Given your relatively high income for your age, it’s likely that there will come a point when you’re no longer eligible to contribute to a Roth IRA.
Also, Waylon: I think the requirement about contributions is that they come from “earned income” that has already been taxed. This does not mean that dollar-for-dollar you can only pay as much as you received from a paycheck. What it does mean is that your employer cannot contribute to the fund or match your contributions — all of it has to be deposited by the individual who owns the account.
Thanks for the advice. I am probably going to put in the max amount in a Roth IRA for the first year, and see what happens. I have a lot in savings now, so for emergencies I’m set. My job doesn’t have a 401k plan right now. I just want to make sure I start young so I don’t have to worry about it as I get older and have a wife, kids, and a mortgage.
I have a question…..all of the Roth IRA examples that have been mentioned seem to be tied to stocks or some mutual fund. My credit union offers a Roth IRA and it has nothing to do with stocks. I just make contributions to it. It seems safer to me to have it this way…interest may not be too much but maybe safer? Here is the information from my credit union:
https://www.fairwinds.org/Information/RATES_SAV.asp
@Ray:
I’m not so sure what your credit union is offering. It doesn’t explicitly say it’s just a savings account. As I understand it, any IRA is an investment account, hence the acronym (IRA= Investment Retirement Account). Though I suppose one could argue putting money in a savings account is investing. On the other hand, the rates seem low to me, so I’m not so sure you would be better off setting up an account with them. You might want to call and ask about what exactly their IRA program entails, the details on their website are nothing specific to their program, just general information about IRAs.
@Waylon:
IRA = “Individual Retirement Account”
@Matt:
Oops. It was always explained to me as an investment account, probably why I got the definition confused.
Very useful article, thank you! I especially like the research questions to ask before setting up an IRA account with a bank or retirement investment company. Little points such as “is it possible to automatically download statements into Quicken” mean a lot! A question I had is, what happens if you need to withdraw money from your IRA, do the brokers above (example Sharebuilder, Fidelity, Zecco, etc) let you do that without striking you with big fees? For example I have a Guaranteed Investment Certificate with my bank of $20,000 and if I withdraw more than $5000 from it, i’m going to get hit with big fees!
According to this website http://www.definerothira.com, there are 8 exceptions that allow you to withdraw money from your IRA without any taxes or fees!
There are 8 exceptions to the 10% early withdrawal penalty (i.e. withdrawals that are taken before the age of 59 and 1/2).
They are for distributions that:
i) Are taken because of the IRA owner’s disability
ii) Are taken because of the IRA owner’s death
iii) Are a series of loan repayments made over the life expectancy of the IRA investor
iv) Are used to pay for unreimbursed medical expenses that exceed 7.5% of the adjusted gross income of the IRA owner
v) Are used to pay for medical insurance premiums if the IRA investor has been unemployed for more than 12 weeks
vi) Are used to pay for the purchase of a principal residence (maximum of $10,000 can be withdrawn). Also, the IRA investor must not have previously owned a home within the last 24 months.
vii) Are used to pay for higher education expenses of the IRA owner or eligible dependants/family
viii) Are used to pay back taxes of an IRS levy placed against the IRA
Can I contribute to or open a Roth IRA if I work outside the US? I am a US citizen, but work overseas locally for a foreign employer. I have been told that I can’t contribute to the IRA, but have no further information.
If so, what are other ideal retirement savings vehicles for expats?
Can I secretly start IRAs for my children and make small annual contributions, since they won’t do it themselves? They have jobs but aren’t earning (or saving) much right now.
You may be able to set up an IRA naming your children as beneficiaries or joint owners of the account, but I’m not sure.
It’d probably be easier to contribute to your own, then transfer the money to them (or to an investment account they own) when you reach retirement age. This of course assumes you aren’t already maxing out your contributions; it also assumes you’ll be able to ensure that the money given to them will end up being invested, not spent.
But I’d check with Vanguard or one of the other companies to see if you can set up an account with your children named as beneficiaries.
To answer Dean back on October 3rd (or anyone else who read all the replies to this and wants to know) Roth IRA’s have the one specific advantage of being able to withdraw money tax free.
IF you still have a large income in retirement, from real estate, stock portfolio, owning your own business etc, you might not have a lower tax rate in retirement than you do right now. That is why for many people a ROTH makes sense.
For the average American who I recently heard only has $2300 in the bank outside of their retirement account… the traditional IRA and 401k/403b accounts make the most sense because when they stop making income from their job, their income will just be whatever they remove from their retirement account for living expenses that year and will be in a lower tax bracket.
Something that a lot of people have asked about here are socially ‘conscious’ or environmentally aware funds. Utopia funds are one of these. Not sure of costs or fees though.
Anyway, visit http://www.utopiafunds.com/ to find out more.
ie, from ‘/about’: “We carefully scrutinize where we invest to ensure that our money speaks our values. We avoid investing in products and services that hurt people… alcohol, tobacco, firearms, pornography, etc.”
I truly think it IS important to put your money where your values are. (No, I don’t work for them!)
I am off to open an IRA today, thanks to this article.
I opened up a Roth IRA last week with Vanguard! I put in the maximum, $5000, and was wondering how to reallocate my funds and which would be best. I’m 23, so I figured a more aggressive plan would work best. Right now it is in their Money Market Fund, which was the general one to put money in when you start. I didn’t know which to choose. Any advice would be greatly appreciated.
Can someone please direct me finding information on what type of Roth to open?
I am a 23 year old, recent college graduate who can afford to max out a Roth. I am not educated enough to control the movement within the roth, and therefore would like to know if money market, mutual fund, real estate, or stocks is my best choice?
Has anyone seen article, books, etc..?? Thanks.
If you want to invest in a Roth IRA but have a beginner’s level of knowledge about investing, try an age-targeted fund. These funds are named according to one’s year of retirement, such as year 2050 for your age. Like you, I am also 23, so I hold Fidelity’s FFFHX, a fund targeted to 2050. Moderate mutual funds like Vanguard’s VGSTX are also good for beginners, like the article says.
question
hi which company or bank would offer a roth IRA for invest in real estate?
thank you
I am 19 years old an i have a CD that is maturing in July of this year, when it matures it will be worth just around 4,000 dollars. I am going to take about 500 dollars out of it, and then i want to reinvest the rest. What are my best options?
Last Yr, I filed w2 for $91,000. But This yr I am hoping to exceed Roth IRA income limit.
So My question is what will happen.
1. If I open an Roth IRA account this yr.
2. Am I permitted to contribute in 2009.
3. Will I able to operate this account. So should I open Traditional IRA.
Please advice.
Thanks
These are all great places to put your money. What about a place like Fairholme? Or Pabrai if you’re already fairly well loaded? They seem to get closer to Buffett-like results.
@Rajesh Kumar
I have the question as you. If you were able to find anything on this topic, please do share.
Thanks!
ETRADE!!!
No Minimum to open an account, and $10 commissions on stocks.
I’m cheap however and look through all the E-Trade “No fee, No load” mutual funds.
I then sort them to find the minimum amounts per fund and look for the “no minimum.”
I’ve got a couple really good deals this way, and up until this past month have been performing very strong.
It’s got a great money transfer function. And in the event I want to purchase some outright stocks it’s only $10 per trade.
I’m really surprised no one here has mentioned them…
I am contributing the maximum 15% to the company 401(k) plan – can I still go ahead and open a Roth IRA account?
Calvin: Yes, you can!
401(k) accounts are different from IRA accounts.
Note that the ‘Roth’ designation can apply to either a 401(k) or an IRA.
Hi,
I’m a total newbie to Roth IRA’s, and have been doing my homework, so to speak, but I have yet to find a good IRA for a victim of the U.S. vampyric educational system. (AKA college). My parents make less than 1,300 a month, and I’m on work study – most of which is taken directly from me to tuition.
I estimate I might be left with 600$ at the end of the year. I could, I assume, afford five dollar payments a month.
But I have no idea how to make this work. Can anyone help me? (seriously, I don’t know anything about the stock market, bonds, and especially mutualy funds!)
Ashley,
You’re golden. Don’t worry about any retirement until after college. After you graduate, get a job. After you have that job, then come back to this site and everything will make sense.
Just don’t get credit cards or take out loans until that point and I promise, you’ll be golden.
Does Vanguard still offer the initial minimum deposit of $1000 if you invest in their Star Fund? I want to open a Roth IRA but I did not see this on their website…it only says minimum deposit $3000
Is it possible to move an IRA from one company to another? For instance, ING seems like a good bet for me right now. I’m just out of college, in the middle of grad school applications, and literally don’t have a lot of time to devote to reading about different investment options. ING has a nice “risk vs. reward rating” for each of their options, which is probably all I need to know right now. Later on, I might have more time to spend reading about investments and might want more options, in which case T. Rowe Price or Fidelity sounds more up my alley. What do you (collectively) think?
TD, yes you can move an IRA from one company to another. I’m moving from Sharebuilder to Fidelity tomorrow, I think. The folks at Fidelity said it can all be done online, and should be initiated from the new account. Your mileage may vary.
My former employer terminated their profit sharing plan & transferred funds into a 401K @ ING under their company name in which I cannot contribute and has dropped 4K this month with the tumbling market. There is approx 18K. My current employer does not offer a matching 401K. I turn 44 next month and from reading this site, comments, and further research contacted Vanguard RE: Star Fund & Target 2030 and set up an acct# while awaiting ING withdrawal papers. I told rep 13K to Star and 5K to 2030. Also for the interim put as traditional IRA for transfer although interested in Roth.Any tax knowledgeable readers? Does this sound good? Help is deeply appreciated.TY
With my 401K bleeding through this market downswing and my company stopping the pension plan – I need another investment source. I’m 52 years old. Am I crazy and/or too old to start a Roth IRA? I don’t plan on retiring until 65.
Dee,
With 13 years to retirement a lot of things could happen. I would say go for it and find a good mutual fund that was performing very well before the crash. Things will rebound and they will rebound dramatically over the next 5-10 years.
There is a good chance you will make some good money being that the market is so low right now.
It’s a good time to buy.
As retirement gets closer though keep an eye on your mutual funds, and how they are trending.
If you invest in Mutual Funds that are small caps, I would switch to larger growth funds.
It won’t be a tremendous amount to live off of, but I would think you would be able to get at least a couple 20% years since we’re so low now.
Dee,
I don’t think you’re crazy, a Roth IRA sounds like a good idea. With 13 years, you may choose more conservative investments with the Roth, like bonds.
Also, with 13 years, you will likely see your 401k recover, and it may be a good idea to continue regular contributions.
TD, Yes you can transfer your account to another firm, but be aware that many companies charge a fee (can be around $75 to $95) to transfer out or close an account! The company you are moving the account to may or may not have a fee reimbursement policy. Good to know both of these facts before making a transfer/closing an account.
– Monica
Hi. I opened a CD IRA with Bank of America a while back. (I didn’t know much about IRA’s back then, except that it was imperative to start early.) The CD is about to mature, and I had planned on transferring it to a Vanguard STAR account, but now that the economy is tanking, should I reconsider? And put it in a CD again, since the return rate is fixed?
My husband has a 401K and is about to loose his job. The company doesn’t have any open positions, so we have this 401K he has been putting money into for 14 years that we need to do something with. Right now Fidelity runs that plan at his company, do we just let them continue to manage it? And if we do, do we still have to contribute to it each month?
Good article.
After doing much research, I decided (with her permission) to open a RothIRA for my wife with Vanguard. I did not want to open yet another account, but the benefits outweighed the inconvenience.
Their Target Retirement group of funds are a very good choice for a RothIRA. They are more of a “set it and forget it” investment. They are low cost and invest in low-cost Vanguard passive index funds. And with the $20/year fee waived with electronic statements, it’s about the best deal out there.
My wife is 47 so we put her in the Target 2025 fund. We invested $5k here in December as the market is so depressed which makes for a great time to buy. We’ll invest another $5k in January as, again, the market will most likely continue to be depressed and be a great time to buy.
To: Barbara #187 I posted previously #175 and did not receive a response but this created an opportunity and pushed me to keep searching and learn on my own. I read all the posts on this site which is an education in itself and glad that it was created. Take control of your 401k and never leave this under the employer company umbrella after termination. The paperwork process depending on the investment firm of choice and the employer HR/Accounting/& Fidelity will determine how long. In my case, five weeks due to many company shenanigans and other nonsense that took place over a four month period. It was made complicated by uncaring people with a lack of knowledge about the process. Even if you stay with Fidelity go through the process to remove any association with the company because if the company changes plans or makes new rules when he leaves then he has to abide by the changes. Also, if the particular fund that it currently is invested drops to certain amount then the company can force him to cash out. In a volatile stock market beware. Ask questions. It is time consuming and expends a lot of energy especially when you get misinformation, lies, and people who really don’t know or care in a company just passing something along without any thought. A minute detail to research but very important is pretax/after tax. Make sure to take time and read every detail of the paperwork. One little check box can create a nightmare if not filled in correctly. Go over it a few times together. Send all mail correspondence certified and pay to have a signature. **Set-up an account and receive an account number with the fund you plan to transfer to beforehand** Also inquire about a fund where you can park it without being volatile to market fluctuation as you make a decision. e.g. Vanguard has a Prime Money Market Fund which people park their money when they want to buy a house or in transition. This saved me thousands of dollars when the market hit the skids during my transition. I found Vanguard to be a superb choice as an individual beginning investor and the staff no matter which call I made were very helpful with excellent tips in making a smooth transition. Look up articles by Tim Middleton and others concerning Vanguard Funds. I went with the Wellington Fund 10K to get in and also another Wellington managed fund called Dividend Growth. Everyone must choose what’s best for their own interest, portfolio, and most importantly the intent and goal in investing in a particular fund. All the best with the process.
= = = for non-retirement accounts:
Just say NO to Sharebuilder or Zecco. Why pay those feed when you can buy shares yourself without a broker?
See a good list of where to do this at:
http://www.dripcentral.com/directory/agents.shtml
= = = Roth:
I have Roths at both Ameritrade and T. Row Price.
At TRP, I have my Roth invested in some of their mutual funds. (No fee, my balance is hight enough.)
At Ameritrade, I can use my Roth to trade stocks.
(No Roth fee at Ameritrade, just cheap commissions on trades.)
–Joe
45, single, Roth IRA or Mutual funds? Which or are both good for me?
Tee, Max out the Roth Ira first, it will grow tax free with tax free withdrawals when you retire. Then invest in mutual funds, I am guessing with in a 401k or 403b account to lower your tax burden. Mark
As of 3/28/2009 Fidelity has lowered its monthly minimum direct deposit requirement to $100.
And also it seems that now you can select quarterly deductions instead of monthly. 🙂
I know this comment comes long after the article was posted, but I wanted to stop by and thank you. Because of this article, I saved up some money and started a Roth IRA — something I have been meaning to do for years.
This is a very useful others. JD, thought about updating it? Thanks,
P-Sz
It makes more sense to put your “rainy day fund” into your 401k. Then if you need it, take out a 401k loan and pay yourself the interest back(plus it makes you re-fund your rainy day money). How is this worse than putting the fund in a low yeild savings account.
Just realized my comment got edited by the POST gremlin.
I meant to say:
This is a very useful article to refer to others. JD, thought about updating it?
I read through the comments but did not see this point addressed by the author anywhere but why would anyone ever open an account on Sharebuilder or any of the discount brokers? Is there something I am missing in this conversation? To me it seems like paying a fee every single year for the privilege of paying less than the $200 a month required by Fidelity. Please let me know if there is a better reason.
thanks.
Already have a 401K. Want to open a Roth IRA.
Can I use proceeds ($5 K cash)leftover from a property sale, to open up The roth ira? I was not required to pay any taxes on this money (inheritance). So can I use this money to open? Will this initial contribution be taxed as income?
Tom, yes, you can use $5000 inheritance to open the Roth IRA; it doesn’t matter whether you got the $5000 through work, inheritance, or selling a car. Do so! The easy way to remember this is that Roth money is already taxed in the ordinary way–you contribute to a Roth IRA with ordinary money, just as if you were buying $5000 worth of clothes and food with that money.
With a Traditional IRA, you’d get to DEDUCT your contribution–lowering your taxes this year in exchange for paying taxes when you withdraw the money.
Thank you Patrick!
Another question…if I may….
I have an inherited IRA with approx $36K. I have to begin taking RMD’s by this Dec 31. Not sure if I should stretch IRA with the RMD’s(over remaining lifetime) OR opt for the 5 year rule (take out increments so I don’t get killed at tax time)and put those distributions into a Roth ira. Not sure if I’m missing another option. Definately can’t do lump sum.
I relly need to hire an advisor, but the last 3 I talked to, were only interested in selling me products that benefit them.
I will take any advice with a grain of salt, but it’s interesting to hear what other’s would do.
Any thoughts?
Im new with the Roth amd investing. I just opened a Roth with T Rowe Price with no initial contribution, however I am contributing $250 a month with their automatic system. My question is this: I am 37 and have no retirement savings nor 401K. I am a freelancer. I want to have some risks with my Roth, (to make up time for the years I didnt save for retirement) but with how things are now in the market i also want to have some safe funds. These are the 3 funds I picked for my Roth: Are there good for me?
– Equity Index 500 – $100 month
– Balanced Fund – $100
– Treasury Money $50
Are these funds diversified enough for me and are the amounts well distributed?? I will appreciate your comments. I am blind when it comes to investing, but i wanted to start with a roth and not wait any longer. Thank you!!
Lilly,
I am no professional, but I read alot and have been researching index fund investing. I too, am soon to open a Roth. I will probably choose Vanguard. Not sure which funds yet. Both T. Rowe and VG have many very similar funds, but the expense ratios at Vangaurd are less than T rowe.(i.e. T.Rowe balanced fund Expense ratio-.69% compared to .25% for Vanguards same fund see here…. https://personal.vanguard.com/us/funds/snapshot?FundId=0002&FundIntExt=INT )
Personally, I like VG for this reason. It could mean substantial savings in expenses over the long haul.(Although Vanguard usually requires more $$ up front and maybe that’s why you chose T.Rowe.)
BTW, I don’t work, nor have I ever worked, for T. Rowe or Vanguard.
I am reading a good book on index funds now….
“All About Index Funds” by Richard Ferri
Maybe this could help with your allocating decisions.
Good luck
Hello Tom,
God, I just checked and your are right… Being new to all this i have been concentrating on some topics and not another like comparing expense ratios. But i am learning!! Question, I do not have the $3K Vanguard requires for the Balanced fund for example, and i have another 2 Funds, the Equity 500 and some moeny on Treasury Money. I would have to wait to have that amount to be able to go with Vanguard. Is theres a penalty to take my investments out of T Rowe at any moment and move them to Vanguard? How does that process work? (Changing firms)? Thank you so much!
I can’t say for sure whether there would be fees attached to switching companies.Can’t find anything to that effect on T. Rowes or Vanguards websites. Anyone else here know????
Only way to know for sure would be to call and ask.
Also, compare your other funds…Looks like Vanguard is cheaper on all fronts. But of course, the stipulation being the minimum $$ up front.
I’m still searching for a great article on “gone fishing” portfolios. I will post when I find it.
If you are eligible to join USAA (if you or a parent are/were in the military), you definitely should. Their Roth IRA minimum investment is $250 and $30/mo ongoing. Using this, I started a Roth IRA when I was 18. Even though I didn’t have a lot to put in it the first couple of years, I got a decent start.
To Patrick & Tom B.: Here are the RULES for a ROTH IRA:
Roth rules
As with any government gift, the Roth IRA comes with a few strings attached. First, you can contribute to a Roth ONLY if you have earned INCOME from a JOB. Say you’re in school, you’re not working and you have a little extra money left over from your student loan or your parents gave you money. You CANNOT put it in a Roth. Also, you CANNOT save more than you made. So if you worked a summer job and made only $3,000, the MOST you could contribute to a Roth would be $3,000.
@ #207. Yes, my husband is in the military and we have our savings and checking accounts with usaa. I’ve been thinking of finally opening an IRA but i just dunno where to put the money and how to start. (By the way, this is a great post! Thanks) After reading the all wonderfull comments above i’m kind of half decided to go with vanguard. USAA IRA don’t have much info about IRA on their website like how much the fee wil be and the likes… So, did they charge you a fee? How was their performance these past few months?
Thanks, spivey..
Magayon,
Here is USAA’s funds >>
https://www.usaa.com/inet/ent_utils/McStaticPages?key=mutual_funds_main
I read numerous sources on investing and many say the same thing…”…if your new to investing, and/or you don’t have the knowledge/inclination/or time to pick stocks, then index funds are the best way to go.”
I chose Vanguards S&P 500 Index fund to start my Roth IRA. This fund is slightly cheaper than USAA’s S&P 500 INDEX MEMBER FUND ..found here >>>
https://www.usaa.com/inet/imco_mutualfund/ImFundFacts?action=INIT&fundNumber=0034&fundCategory=IX
(check expense ratios) AND I already have an Inherited IRA with USAA (and didn’t want all my eggs in one proverbial basket).
Good Luck.
Tom
Thanks, Tom..=)
If you are lucky enough to work in a company that offers a Roth 401k, you will be that much better off than those with just a regular 401k.
check Kaching.com. If you want to get steady returns then you should find an RIA on KaChing. The fee structure is very low and you get access to some fund managers who usually have million dollar minimum investments.
For #209 Magayon…”How was their performance these past few months?”
With my money in a Roth IRA with Vanguard, invested (for now solely) in their S&P INDEX FUND
I am up 9.25% since july 2009. Not as good as picking stocks could have yielded by now, but not shabby for having to do nothing and fairly cheap too (.18% expense ratio). Easy to track performance on this fund. It is very closely tied to the performance of the S&P. When S&P moves up 100 points…the fund moves up (roughly) 100.
Thanks so much for posting this information! I do my banking with USAA, but I just started a ROTH IRA with Vangauard… I choose the STAR fund, which only has a 1000 initial contribution minimum. It was easy to set up online and took about 15 minutes to go from start to finish. It was also easy for me to set up automatic monthly contributions from my USAA checking account to my ROTH IRA. Much easier to set up than I thought it would be! Wish I hadn’t put it off for so long.
*QUESTION* for all of you knowledgable people: Now, how often should I log onto the Vanguard site to look at how my ROTH IRA is doing? I picked the STAR fund because it is supposed to be low risk. Do I need to check up on it monthly, yearly? Is it alrigth that I am putting the maximum yearly amount into the STAR fund ($5000)?
Michelle, many say to check it only quarterly, which is good if you are prone to too much tinkering. You don’t want to be tempted to become reactionary. The great thing about a “lazy” portfolio is that it is never bad and you should make changes when you’ve learned more about the investment philosophy you want, not when news happens or when it goes up or down.
The STAR fund is very conservative and balanced, so it is certainly okay to start there with 100% allocation. As you learn more, you can decide when to move a portion into other funds. Perhaps the Vanguard Target Retirement 20xx funds are the next ones you should consider?
This sounds perfect. I’m 18, and just a temporary employee for now so I have no 401k benefits, so I’ll be sure to fund my ROTH IRA instead.
Thanks for the links!
Great article…many thanks. It really answers all the questions one would ask in regards to opening up a Roth IRA. Very informative.
Discount brokers and full-service brokers charge fees on every trade into a stock, ETF, bond, or mutual fund. These brokers will tout no-fee mutual funds (also called no-transaction fee mutual funds) to show that they aren’t out to make a buck on every transaction you have for retirement. The easiest way to avoid unnecessary fees on your mutual funds is to simply cut out the middleman. You don’t need 10,000 different mutual funds nor do you need to pay for every transaction you have to buy or sell into those funds. A well constructed portfolio of low cost index funds can offer you the best returns at the lowest cost.
Can we open a Roth or Traditional IRA for our kids? Is there any kind of tax write off for that?
Sharebuilder charges no fee for a Roth IRA…despite what someone says on here.
Great article! Thank you for it. I just went to T.RowePrice.com to try and open a Roth IRA. The minimum balance amount for free of annual charge accounts is $10,000 otherwise you always pay $20 plus $20 if you close the acct. (there may be more fees, I have not discovered yet). And you have to agree to delivery of all material through email (paperless), which I do not like so much. Just an update, but maybe somebody posted this already in between (could not read all 223 comments).
I was searching for information to start a Roth IRA. The article and all the comments are very informative.
Most of the commissions and fees quotes in this article are outdated, and as of a few weeks ago Zecco no longer exists (merged with TradeKing). Definitely time for an update 🙂
In comparing your options, Schwab is also worth a look. My previous employer’s 401k was with Schwab and I chose to stick with them after shopping around. IRAs have no annual fee (long as you set up monthly ACH deposit or initial deposit of $1,000) and they have a good selection of $0 commission Schwab ETFs with the lowest management fees that I can find (0.04% up to maybe 0.50% on the high end). If all you want is a few ETFs to diversify while paying as little as possible in the process, they’ll be tough to beat.
God, I just checked and your are right… Being new to all this i have been concentrating on some topics and not another like comparing expense ratios. But i am learning!! Question, I do not have the $3K Vanguard requires for the Balanced fund for example, and i have another 2 Funds, the Equity 500 and some moeny on Treasury Money. I would have to wait to have that amount to be able to go with Vanguard. Is theres a penalty to take my investments out of T Rowe at any moment and move them to Vanguard? How does that process work? (Changing firms)? Thank you so much!
I started a Roth IRA at Scottrade with only $500 on the advice of my boss who was formerly a broker. He gave me a coupon code (SLUK8981, no expiration date and anyone can use it) to get 3 free trades. (He also gets free trades when code is used – referral reward). Instead of investing in a fund I just purchase stocks on sale. I like the control and I am doing ok even tho my knowledge of stocks is linited. The low barrier to entry was key in getting me started and now I am enjoying working within my account tax free.
Thank you! This was very helpful!!
I like the advice in regards to paying off your credit card debt prior to investing in an IRA. To pay off your credit card debt, start with paying on your highest interest accounts. Pay as much as you can towards the highest interest credit card, once it is paid off move to the 2nd highest interest account.
Just pay your minimum payments on the other accounts with low interest in order to put all of your extra money towards the high interest account.
I will check out Vanguard since it is most affordable and reputable.
As I’ve gotten older, I have begun to think a lot about my own IRA. I don’t even have the means to contribute much at this point, but I guess it’s better to start doing research now. I found this post to be particularly helpful! Do you happen to have any posts (or plan to write anything in the future) about self directed IRA rules?
I read the article about roth ira. I have one just opened with merrill. I wanted to know how r they as compared to some others listed.
I’m a starter in Retirement saving’s and believe that a Roth is the way to go. This is very useful info. for someone like myself, I’m excited to begin the process of saving for my retirement even though I feel it’s a bit late.
Sharebuilder? Why would you open an account with an outfit that charges you every time you invest? You state that sharebuilder makes it easy to invest automatically, but so do all the other places you mention. That seems like the worst possible choice, imho. I don’t mean to be a buzzkill, but really, fees are something you should be avoiding, and those charged by Sharebuilder are absurd. Go with Vanguard or Charles Schwab.
Hi, I just recently acquired a job with the city, and they provided me a retirement plan with IRA ICMA-RC. I really want to know how these things work with saving and investing. I’m 20 years young and I still don’t get how the reality of retirement and saving. I’ve tried doing research but still really confused. Where can I seek help?
Do all Roth IRA’s have a minimum monthly contribution? I have the funds right now to make a $2,500 initial deposit but I don’t want to be locked into paying a set amount every month for the rest of my life.
I know this is an old site, but I had a couple of questions.
1. Is it still valid? The information from 2007.
2. I currently have two Roth IRA’s (one for my wife, and one for me. They both have around $9,000 each. However, we just switched from one financial advisor, to another financial advisor in the firm I am currently with. She informed me that there is 5.5% transaction fee for each transaction to these accounts. I am putting in a little over $400 month for each account. It adds up to be about $it adds up to be about $80 a month they are taking for themselves. I did not know this until the new financial advisor told us this.
So now I am thinking about going to one these no fee Roth IRA funds for both of us.
Can I take from these Roth IRA’s I already have, and transfer them over to another no fee Roth?
Or do I just startup a new no fee Roth, and just stop contributing to the older ones?
Michael
Michael – I can curious about this too!
This is a wonderful post! Very helpful!
One quick question. I am married to a Dutch girl (who does not have US citizenship but a US Green Card) and I want to start a Roth IRA. I am 22 years old and we do not have kids. If somehow I die in the upcoming 10 years (and we still have no kids), could I pass the account to my wife (a non-US citizen)?
I haven’t been able to find the answer anywhere…
Good article. Especially important with so many people doing freelance or working part time now… we can’t rely on employers to take care of 401k stuff for us!
Hi JD,
I’m an international student who just finished my master’s degree here in the US but I’ve visited different company websites and only allow either US citizens or green card holders to start a Roth IRA account. I’m not sure if this is accurate with the majority of good rate companies.
At 67 yrs of age, and longevity in our family,is it still possible to start an IRS Roth?
I’ve been hearing so much about the benefits of opening a Roth IRA. Although I have a 401k, I know it’s not enough. I’m going to bookmark this because opening some form of IRA is definitely on my to-do list. The sooner, the better.
I hear about the benefits of IRA but after this article will try,thanks
Once you open an Roth IRA account . How do know what to invest your money into?
Great post! This was the hardest thing for me to understand when I was in my early 20’s, this is a great article for everyone to get started. I opened my Vanguard Roth IRA three years ago and used a few index funds to get started. I’ve been able to max out each year & happy knowing I’ll be able to use TAX FREE in retirement (unlike my 401k)
I am interested in a traditional IRA. Not much money to start but that will change
What is the minimum investment to open a Roth IRA?
Hi Don,
Thank you so much for this great question. The correct answer is zero! There is no minimum investment needed to open a Roth IRA. If you’d like to start with $1 or $5 you certainly can — and should. The reason why is that contribution maximums are pretty low for both traditional and Roth IRAs so the key is just to start at whatever level you are comfortable with. (The maximums are $5,500 or $6,500 if you’re age 50 or older for 2016). Now this doesn’t mean that some individual companies won’t have minimums listed in their marketing copy. Key here is to ask anyway because often they are simply “suggested” minimums. They probably are eager for your business so it doesn’t hurt to ask. I hope this helps Don!
–Katie
Its nice and informative post. This is very important for those people who are doing freelance work now.