Opening a Roth IRA account is really pretty simple. The problem is that there are so many choices of where to put your account that it can be confusing. You should go through a 5 step process in opening any Roth IRA account:
- Determine that you are eligible to open a Roth IRA
- Decide whether a Roth or Traditional IRA (or other retirement plans) is the best option for you
- Identify potential size of account, the length of time until you will withdraw, and what type of investor you are
- Choose where to open an account – bank or brokerage or Mutual Fund Company
- Contact the company, fill out application and send money
Roth IRA Eligibility
There are a lot of rules in determining if you are eligible to open a Roth IRA. The place where you open your Roth may help you to determine if you are eligible, but don’t count on it. It is your responsibility to know that you are eligible. (If you don’t know, read this article first: Roth IRA Eligibility)
Decide on Roth vs. a Traditional IRA
This is the main decision you’ll need to make before you can open an account. Once you find you are eligible for either a Roth or Traditional IRA or both, choosing between the two needs some thought. So if you are unsure, read this article before going on: Roth IRA vs Traditional IRA
Identify Size of account, Length of time until Withdrawal and Type of Investor
These factors will determine where you will open your Roth IRA account and the type of investments that you will put into the account. So, you’ll need to do some self analysis about your appetite for risk where money is involved.
How big will your account be?
Most banks don’t have minimum requirements for savings accounts, but they do for CDs. Brokerage firms and Mutual Funds definitely have minimum requirements to open accounts, usually $2,500 per year. So you need to figure how much you will put in. You usually don’t have to have the minimum amount up front. Most of the companies will accept weekly or monthly deposits as long as you meet the minimum amount by the end of the year.
How long do you have before you will withdraw your money?
When do you plan to withdraw the money from your Roth? If you are young and have 20-40 years before you will touch the money, you can and should consider putting the money in more risky investments such as common stocks. Over time, stocks will outperform the interest you can earn in a savings account or CD.
If you only have 5-10 years until you will retire, you will want the money in less risky types of investments. Here a bank CD may suit you very well.
What type of Investor or Saver are you?
This is a primary decision you need to make. Most average investors don’t like taking on risk with their retirement money.
In their 401ks, they were encouraged for years to put money in stock funds. Then in 2008 the stock market simply crashed and investors lost up to 60% of their assets. If such investors left their money in stocks, they are pretty much back to even in 2011. Unfortunately, many average investors took their money out of stocks after the stock market crash occurred. So they lost a lot of money, and are now in money market accounts or GIC funds, which are earning a low interest rate.
I address the types of investments you should have in other articles: What Types of Investments Can you Use in a Roth IRA and Choosing the Right Manager for Roth or Traditional IRA Investments.
Here we are concerned with opening the right account after you determine what investments you want. If you want stocks, that will send you to brokerages or Mutual funds. If you want minimal risk, you can look at Banks that are FDIC insured, or certain Mutual Funds.
Choose where to open your account – bank or brokerage or Mutual Fund Company
Just about all major financial institutions are approved by the IRS to handle your Roth IRA. Be sure to compare and understand the administrative and investment fees among each of the institutions. This is where there could be big differences.
Here’s the information you will need to have available when you open your account:
- Your social security number- they need this for reporting to the IRS
- Your checking account information- brokerage and mutual funds will want this. If you contribute monthly, they can take the money out of your account automatically. Should you make a withdrawal, they can wire the money directly into your bank account.
- Your employment/salary information – this will give the company a lead into whether you are eligible for a Roth IRA. While they are not liable if you are not eligible to open account, most of the companies want to assist you in determining your eligibility.
- Money – How much depends upon where you open the Roth. You might only need $20 or you may need $2,500.
- Time – it will probably take about 30 minutes to open an account at any of the institutions, but I would allow 1 hour.
Opening An IRA At Banks, Credit Unions, Trust Companies
You’re familiar with the banks. You can open a savings account or various length CDs for your Roth IRA. If you have decided to take minimum risk with your Roth investments, just walk into your local bank where you have your other accounts and talk to the Banking Officer. You could shop around for the best CD rates. But at today’s low interest rates, I wouldn’t bother spending too much time shopping. The more important item is length of CD. If you have a long time until retirement, you might think that you open the longest CD they offer. In today’s market, this is not the best approach. Interest rates are still at record lows, and they have nowhere to go but up. You want your CDs to have shorter maturity so you can roll them over into higher rates when they mature. So, I would stick with the 1-3 year maturity range.
Mutual Funds In IRA’s
Mutual Fund families give you a lot of choices in investments. You can select stock funds, bond funds, money market funds, and a whole host of specialty funds. If you want investment diversification, but are not familiar with the offerings of different companies, or want all your funds in one place, choose a No-Load Mutual Fund Company, such as T. Rowe Price, Vanguard, or Scudder for your entire Roth account. These fund companies do not have any Sales charges on any of their funds and their annual administrative fees are relatively low. Choosing a name brand company such as Fidelity is ok, as long as you know how to select among their Load and No-Load funds. Many of their funds have 4% Sales charges to get into the fund.
A lot of the Mutual Fund companies also have Brokerage Units. So if you want to put some money in individual stocks, you can do it at the same company as your mutual funds.
Opening a Roth at a Mutual Fund Company is quite easy. Do a Google search for Mutual Fund companies, and get the phone number of the company you want. They will take you right through the account opening process over the phone. You can also do the account opening online.
A brokerage account might be the way to go if you want to invest your money in individual stocks, bonds or other investments. All of the brokerage firms offer Roth IRAs and will open the account over the phone. As noted before, many of the Mutual Fund companies also have brokerage divisions so you don’t have to go to a separate firm.
Some of the better known, low commission brokerage firms for a Roth are TD Ameritrade, First Trade, and Scottrade.
The insurance companies mainly offer annuity contracts for Roth IRAs, but over time have developed more investment products. You can simply pick the company and call the agent where you have other insurance policies such as Metropolitan Life, Prudential, State Farm, etc. You really need to understand what’s in the contract you will be signing. Insurance/annuity contracts are notorious for the small type or confusing wording, and you may not be sure of what you are buying.
Open the Account
As I stated before, most of the Roth IRA accounts can be open in person, over the phone or online. Once you open the account, you will start to receive monthly accounts statements.
You will be asked during the account open process to designate your beneficiaries in case something happens to you. Normally, most people put their spouse and their estate as contingent beneficiary should your spouse not be alive. You should check with an estate attorney if you have any doubt about your estate situation.
Also, many people don’t understand that a beneficiary designation overrides your Will. So if you designate your spouse as your beneficiary on your Roth account, that designation exists until you change it. If 5 years from now you have marital problems and change your Will, any changes will not affect the beneficiary designation on file with the institution. You must do a new written designation if you want any changes.
Administration of your Roth IRA Account
Recordkeeping is easy assuming you have all your Roth IRA’s in one institution. You will simply get monthly statements from this one institution. But, there’s nothing to stop you from opening several accounts at different banks, brokerages and mutual funds for diversification. Here, it is you that will have to keep track of what money is where, and what it’s invested in. Most people just open up their Roth at one institution for ease.
Just Open up your Roth IRA
Opening an account is easy. If you really can’t decide what you want to invest in, then just go to your local bank and open up a Roth. You can always move the account to another firm later on. The important point is to just get an account open and start earning money that will be tax free to you when you retire.