How and Where to Open an IRA or Roth IRA Account and Factors to Keep in Mind

I receive a lot of questions on Individual retirement accounts (IRA) based on related posts I have written on this topic. One question that seems to come up often, is how to actually open an IRA account and where is the best place to do so. An IRA  is your personal savings plan for retirement, offering tax advantages and growth that compounds over time.  Unlike employer sponsored 401(k) plans, where the administration is taken care of by the company, you are responsible for the opening and ongoing management of your IRA account.  Luckily most of the major brokerage houses and investment firms have made this process easy and like regular investing you just need to look at the broker costs, customer service and available range of investment options.

Difference between a Roth and Traditional IRA

IRAs come in two types – Traditional and Roth. Your selection depends on a few factors—for example, your age, income, and whether you’re investing in an employer plan.  You’re eligible for a fully deductible IRA contribution if neither you nor your spouse participates in an employer-sponsored (401K) retirement plan. If either of you do participate in such a plan, your ability to deduct your full IRA contribution may be limited by your income.  The chart below summarizes the options and the key differences between the two IRA accounts, which is basically the tax treatment of contributions you make and tighter income restrictions for Roth IRAs.

The good news is that you can rollover funds between the different IRA account types as your financial, employment or tax situation changes. I would recommend you also visit the IRS website and read the literature the various brokers (listed below) provide on the specifics of IRA plans.

Traditional vs Roth IRA features and tax differences
Traditional IRA vs Roth IRA comparison

Where to open an IRA account

Thanks to the internet and ton’s of quality competition, opening an IRA is relatively easy. The harder part is picking the best investments. Though target date funds that invest based on your age profile and years to retirement have made this much easier. For most brokers it should take 30 minutes to 1 hr. to open the accounts and go through the administrative details. Opening an IRA account is just like opening a brokerage account, except that you are designating it differently to get the tax benefits.

Key Factors to Consider When Choosing an Account

Whether you open a Roth IRA or Traditional IRA, the following factors are important to keep in mind

– Rollover specialist. Most good IRA brokers provide you with a phone number for their IRA specialists who make the process of opening, converting, managing or transferring an IRA account much easier. Go with brokers that have this offering so that you can speak to real person when you need information or help with your IRA account.

Cost. You can trade within your IRA account as you would a regular account(except for certain investments not allowed by law. Also, since you will have to reallocate assets as you grow older and/or market conditions change significantly you want a broker with low costs to that you can maximize your returns.  Even a small amount of extra costs can add-up to thousands of lost retirement savings over time.

Investment Options. Like any good shopper, you want choice. When it comes to financial shopping, this means investment options. So make sure you go with a brokerage or investment company that offers plenty of investment options specifically for IRA accounts. Also if you just want an IRA where the professionals take care of all your choices, then make sure the company offers a target or age-based investment fund option.  Target date funds are made up of an investment selection based on your age profile and years to retirement. The younger you are the more aggressive the mix (i.e more equities than bonds). Whatever your need, make sure you go with a broker that has a variety of investment offerings

Based on the above criteria and from what I have seen, here is a list of well known brokers and fund managers that are good choices for opening or moving your IRA account to:

TD Ameritrade – Are the best known brokers around and have a pretty extensive IRA offering. They make opening or transferring an IRA account a very easy process. Compared to a lot of brokers they also have a lot of IRA investment options and retirement research to help you choose the best option.

Vanguard – Probably one of the strongest players in the IRA and retirement industry, thanks to their range of low cost offerings. They have a very simple account opening process, but their biggest draw back is that most Vanguard funds have a $3,000 minimum initial investment. Still, if you want a safe and stable choice, Vanguard is not a bad place to start. Fidelity and T Rowe Price are also in the Vanguard mold and are equally good choices. I have my current employer sponsored 401K with Fidelity and if I were to leave they provide a seamless way to move or rollover my 401K funds to an IRA account.

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4 thoughts on “How and Where to Open an IRA or Roth IRA Account and Factors to Keep in Mind”

  1. All are good choices. If you’re going to invest in mutual funds, Vanguard has the lowest expense ratios in the industry. If you think you would invest in individual stocks, then a slight edge to Fidelity. E-trade is also a dec

  2. I personally use Fidelity and I really like their service. I don’t think that there is a material difference between the companies. They are all very large, secure, no-load companies. If you check out the web site for the three fund families that you mentioned, they will all most definitely have a link that talks about all of their 4 & 5 star rated (Morningstar Rating) funds. You may want to choose the fund family that has the most highly rated funds over a broad spectrum of investments. That is why I like fidelity.

    Most of the target retirement date mutual funds invest the majority of the assests in mutual funds of the same mutual fund family. In this respect, it is probably better to pick the family that has the largest and most diverse portolio of funds. It is a very good investment choice for a small investor.

    Try to also pick a family or service that will offer you options down the road. I know you can invest in stocks, bonds, and annuities with Fidelity, I’m not sure about T.Rowe and Vanguard. My point is, you my want that feature in five years.

    I strongly encourage you to investigate the websites for all three. Ask yourself what kind of research and analysis features they offer you. If you are 25 and saving for retirement, you’re already a leg up on most Americans. Down the road, you’ll want many of those features.

  3. Sean – They all have some excellent funds and I recommend a target date fund since you are new to the game. But, if you do choose a target date retirement fund, you will miss out on the fun of choosing which funds to invest in. Investing actually can be fun. Personally, I would rather pick my own funds and have the option of choosing whether to invest my money in foreign stocks, U S stocks, large cap, small cap, or bonds. But many young investors have a tendency to go for broke when they are picking mutual funds. Many of them did go broke as a result in 2001-2003 when their go for broke funds went broke. So picking a target date retirement fund means you leave the choice of investment allocation to someone who is not so likely to use a daring strategy. I do have one criticism of the target date funds however. They are way over allocated to U S stock holdings. To me that is extremely risky. The Vanguard 2050 is 72% U S stocks for example. Fidelity 69%. T Rowe Price 64%. Personally I think about 40% is about the maximum that should be invested in U S equities. The U S economy is not the most healthy on the face of the Earth.

  4. Fidelity, T Rowe Price or Vanguard for Roth IRA?

    I am planning to open a Roth IRA before this year ends, I’m 25 year-old and plan to invest in one of those target date retirement, is that a good idea or should I make up my own portfolio consisted of all stocks since I’m still young? In addition, I’m debating of where to open my account between Vanguard, Fidelity and T Rowe Price. I see that Vanguard has the lowest expense ratio, but what about their performance? Where should I have my account open? Please share your experience. Thanks!


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