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How to Open an IRA
By MP Dunleavey on Thursday February 04, 2010
When we met Ashley on Monday, she was pacing the floor, worried about her future savings—when suddenly she got the news that her mother had already opened a Roth IRA in her name.
This raised several questions for Ashley, and a particular one for many readers, who asked: How do you open a dang IRA anyway?
Because we don't want you to miss a single step in this invest-along-with-Ashley, here's the answer.
- A common misconception. Many people assume that when they open any sort of IRA or 401k, that this IS the investment. It's an easy mistake to make, because people always say that you "contribute to your IRA or 401k." Not quite.
- To open an IRA, call Fidelity, Vanguard or another low-cost or discount brokerage and tell them that you want to open an IRA or a Roth IRA, if you prefer.
The IRA or 401k is just a vessel: an empty egg carton, a truck with no cargo. You select mutual funds (usually) to put onto your truck or into your egg carton. The money you deposit grows inside these investments.
If you're not sure which mutual funds or investments to pick yet, that's fine. Get started simply by depositing cash into a money market account, in the IRA—which is like a savings account—and later, when you know more, you can transfer that cash to the investments of your choice without incurring a penalty. This is a first step! We won't let your new IRA languish, uninvested. Keep following Ashley's story here on DailyWorth.
Note: If you're calling HR to open your 401k, the rules and options may be quite different, but there is often a money market option you can pick.
The point is to start investing regularly, we hope immediately, so that it becomes second nature.
Comments
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written by Linna , February 04, 2010
written by Linna , February 04, 2010
YES! This is the exact topic that I am most interested at this moment in my life. I want to open a Roth IRA STAT but am not sure what to invest in! There are a zillion mutual funds, and I know I want to invest some money in an index fund and would like to do monthly transfers but am not sure - are there transaction fees each time there's an automatic transfer into your Roth? What words and jargon do I need to look out for in the prospectus? So many questions.......!
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written by Chris , February 04, 2010
written by Chris , February 04, 2010
Is there a good website to compare companies? I know that you mentioned Fidelity and Vanguary, but there is also Schwab and ING Direct. I'm not sure the best way to evaluate them.
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written by Lara , February 04, 2010
written by Lara , February 04, 2010
Okay, so I'm self-employed and I want to contribute to my IRA. How do I make that automatic and how to I - can I? - make that a before-tax transaction?
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written by MP Dunleavey , February 05, 2010
written by MP Dunleavey , February 05, 2010
To all three questions: The MOST important thing to remember is that this isn't as complicated as it seems. You can make a choice--of an IRA, or a financial company, or a mutual fund, or a contribution level...and then CHANGE ALL OF IT. nothing in the investment world is set in stone.
The point is to get going, overcome inertia. Don't let the questions get in your way. Open an IRA at Fidelity or ING or Schwab--it doesn't matter much in the short term. Start saving. How do you make it automatic? You tell them that's how you want it. Then you fill out a form. If you don't know which mutual fund to pick right now, follow the advice in the Daily above, and put it in cash, in a money market account. You can invest the money elsewhere, in a month or two--and you will. You can't leave your retirement in cash, or inflation will eat it. More on that as the Invest-Along continues...
The point is to get going, overcome inertia. Don't let the questions get in your way. Open an IRA at Fidelity or ING or Schwab--it doesn't matter much in the short term. Start saving. How do you make it automatic? You tell them that's how you want it. Then you fill out a form. If you don't know which mutual fund to pick right now, follow the advice in the Daily above, and put it in cash, in a money market account. You can invest the money elsewhere, in a month or two--and you will. You can't leave your retirement in cash, or inflation will eat it. More on that as the Invest-Along continues...
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written by Trainerpack , February 05, 2010
written by Trainerpack , February 05, 2010
What are the fees that are usually associated with opening an IRA?
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written by brooklynmoney , February 05, 2010
written by brooklynmoney , February 05, 2010
I'm all for everyone opening an IRA, but you shouldn't just run out and open an account somewhere. There are rules and there are some options that are better than others depending on your situation. Self-employed people might want to check out a SEP-IRA. Anyone w/ an employer who offers a 401K might benefit more from contributing there first if there's a match. Roth IRA's have income limits. So, yes, it is a little complicated, although not so much that it should stop anyone.
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written by Petunia , February 05, 2010
written by Petunia , February 05, 2010
Trainerpack, fees vary greatly from custodian to custodian. Typical fees include annual custodial fees, transaction fees to buy/sell, and of course the underlying expense ratios of your investments (if you own ETFs or mutual funds). If you invest through a commissioned salesperson there are loads to pay as well. It is easy to avoid loads and transaction fees, simply choose a no-load mutual fund held directly with the fund company. An annual custodial fee of $10 - $20 per fund is reasonable. If the custodian you are considering charges more than that, cross them off of your list. Annual custodial fees are often waived if you will sign up for electronic delivery of all statements, or if your balance exceeds a certain amount.
So in short, you can avoid all fees other than the underlying expense ratios (which can never be avoided).
So in short, you can avoid all fees other than the underlying expense ratios (which can never be avoided).
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written by Petunia , February 05, 2010
written by Petunia , February 05, 2010
Another good candidate for your IRA custodian which hasn't been mentioned yet is T. Rowe Price. T. Rowe Price's Target Retirement funds are on Money Magazine's list of top funds, and the really great thing about this no-load company is you can get started with $0 if you sign up for automatic contributions from your checking account of at least $50 per month. (They refer to this as Automatic Asset Builder).
My IRAs (Roth and traditional)are at Vanguard, in my view the best choice of a custodian. However, you can't get started at Vanguard with less than $1,000, and you have only one investment choice unless you have at least $3,000.
Fidelity and Schwab are also good choices, but I would steer clear of ING for investments. Their mutual funds are mediocre at best and have high expense ratios.
My IRAs (Roth and traditional)are at Vanguard, in my view the best choice of a custodian. However, you can't get started at Vanguard with less than $1,000, and you have only one investment choice unless you have at least $3,000.
Fidelity and Schwab are also good choices, but I would steer clear of ING for investments. Their mutual funds are mediocre at best and have high expense ratios.
