Nickeled and Dimed

All this week we are going into detail on each of my four steps to financial freedom.  So far we have covered strategies for paying off debt, how to start an emergency fund and retirement accounts.  Today we will take the retirement accounts one step further and discuss how and where to open a Roth IRA.

What is a Roth IRA?

As we discussed yesterday, a Roth IRA is an individual retirement account that offers tax exemption on all gains made from the investments in the plan.  You can contribute up to $5,000 per year ($6,000 for those 50 or older) and may use the contributions to invest in anything from stocks and bonds to real estate.

Unlike a 401(k) and other retirement plans, it does not need to be company sponsored, which means you can open one up and start investing in it right from the comforts of your own home.  I’ll show you how to do just that later.  But first there are some questions you will want to ask yourself to get a feel for where you want to open your account.

What qualities do I want in my Roth IRA?

Before choosing a Roth IRA, you should ask yourself the following questions.  There are several different places to open an account, these questions will help you narrow down the choices.

• How much can you afford to deposit right away- Some banks will require you to make an initial deposit as high as $2,000.  Know how much you can deposit right away and then check what the requirements are for each bank you are interested in.
• Do you want to make automated monthly deposits- If you don’t have the money to make a large initial deposit, you will likely have to agree to make automated monthly deposits of at least $25.  Figure out how much you can afford to contribute each month.
• How much control do you want over your investments- Do you want total control over what stocks, bonds and other things your account investest in, or do you want to invest in a well diversified fund and let them do the rest?  Different banks offer different investment options.
• What kind of fees are involved in the plan- Know up front if there are fees or other charges involved and try to find an account with as little as possible.

By answering these questions ahead of time you can quickly and easily navigate through the different options to find the one that best fits your needs.

What will I need to open an account?

Opening a Roth IRA online will generally require only the following three documents.

1. The routing and account numbers of the bank you will be using to deposit funds.
2. Your social security number.
3. Your home and employee information.

Have those documents ready and you can have an account up and running minutes after choosing which one you want.

Which bank should I choose?

This part is entirely up to you and the qualities you are looking for.  I’ll discuss the qualities of three of the top online Roth IRA’s, but you will still want to do your own homework to see if there are others that better fit your needs.

• ING Direct- Like with their savings accounts, ING Direct offers a Roth IRA that is incredibly easy to open and use.  They offer a low initial deposit requirement of $250 and will waive it altogether if you choose to automatically contribute at least $25 a month.
• Fidelity- Has a minimum initial deposit of $2,500 that they will waive if you agree to automatically deposit at least $200 a month.
• T. Rowe Price- A minimum initial deposit of $1,000 that can be waived with automated monthly deposits of at least $50.

All three of these are excellent, well respected banks to start your Roth IRA with.  Do your own homework.  Check out their other features.  Explore other options.  Ultimately the most important thing isn’t which bank you choose, it’s that you make a decision and get started investing.

Example

Let’s go over a step by step example for opening a Roth IRA using ING Direct .  Please note that with ING Direct you will have to have another account with them to use their Roth IRA’s.  So if you chose them for your emergency fund, this could be a good choice for you.

1. Log on to www.ingdirect.com.
2. Choose open an account.
3. Scroll down to “Investing and Retirement” and click on “IRA Center”.
4. Choose “Roth” in the open now box on the right hand side.
5. log in to your account.
6. Fill out all the requested information and choose how you will make your investments.
7. Begin maxing out your contribution and watching your retirement account grow.

Should I make a large initial deposit or make regular monthly investments?

While some investors will recommend the large deposit, most will tell you to make the regular monthly deposits.  And I agree unequivocally.  Making regular contributions, or ”dollar averaging” can be an unbelievably effective way of investing, especially in a volatile market like this.  We will cover the concept of dollar averaging later, but it is maybe the best tool you can use to invest.

How much should I contribute?

The max.  Period.  If you can’t afford to do this yet, do the max you can afford and continue working to contribute more.  A Roth IRA, or any IRA, can be the difference in a great, enjoyable retirement and a miserable one.  Find ways to cut expense and spending so you can contribute more to your retirement accounts.  As Dave Ramsey likes to say, “if you live like no one else now, you can live like no one else later”.  Don’t fear this market, embrace it.  There has never been a better time to start funding your retirement.  Use this article to open your Roth IRA and start investing in it today.

Tomorrow on Centsability to Wealth we will discuss creating passive income, the ultimate financial achievement.  Please continue sending any tips, questions and story suggestions to centsabilitytowealth@gmail.com.