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Which Investment Companies Should You Open Your Roth IRA With?

Published 2/27/08 (Modified 6/17/11)
By MoneyBlueBook

So you're thinking of opening a Roth IRA account? Congratulations! Although it's only one small step forward in sound financial planning, it's one giant leap towards building your financial future and saving for retirement. By now you've likely settled on which investment retirement account (IRA) vehicle is best for you. There are three major types - Roth IRA, deductible IRA, and the non deductible IRA. All offer tax deferral benefits but the retirement account that is most appropriate for the majority of ordinary individuals and married couples is the Roth IRA. Unlike traditional IRA's (both tax-deductible and non-deductible), Roth IRA's enjoy several great advantages and benefits which make them very attractive for those who want to invest and plan for their future retirement. Here is what every prospective Roth IRA investor and account holder should know:

  1. Withdraws from Roth IRA's after age 59.5 are generally not taxed, because you pay your taxes on the front end by contributing after tax dollars.
  2. Because most people steadily increase their total income over time as they get older, they usually either stay in the same marginal tax bracket or end up at a higher bracket level at retirement. Thus, Roth IRAs enable savvy savers at retirement to accumulate more money than even tax-deductible IRA's.
  3. Unlike a traditional IRA, not everyone is eligible to open and contribute to a Roth IRA. For both 2009 and 2010, the Roth contribution limit is $5,000 as long as your income falls below $105,000 if you're single, and $166,000 if you're married filing a joint tax return. There are income phaseouts after that.
  4. Unlike a traditional IRA, with a Roth you can withdraw your original contribution money at any time for any emergency reason, tax free, and without penalty and you don't have to replace the funds, unlike a 401K or a traditional IRA. Of course, it's always best not to withdraw because that stops the compound interest process.

Choosing The Best Broker To Open Your ROTH IRA Account With, And What To Look For:

The majority of investors choose to start their retirement savings with a Roth IRA. The best course of action is to open the account with a reputable broker rather than a bank. Some banks and credit unions offer retirement accounts but their choice of investment vehicles like certificate of deposits are often limited with low rates of return. Here are some basic criteria you should take into consideration when deciding which broker to open your Roth IRA account with:

  1. Choice Of Investment Options Including Mutual Funds and Exchange Traded Funds (ETF's) - A Roth account is merely the account type. With the funds your contribute to it, you can use it to trade any type of investment vehicle you wish from stocks, bonds, to mutual funds.
  2. Low Commission Costs and Account Fees - My recommendation for new investors is to stick with mutual funds and low cost index funds. Always make sure the maintenance fees for funds are reasonable.
  3. Automatic Contribution - For those who wish to invest regularly, try to look for a retirement broker that offers the ability to make automated fund transfers into your Roth from your linked bank account.
  4. Minimum Balance Requirement - Most brokers have minimum initial investment and balance requirements. For new investors, the minimum requirement may be an initial hurdle if the limit is to high. However, even for those who only want to start up with a few hundred dollars, there are options available.

Investing In Mutual Funds - The Best Approach For New Roth IRA Account Holders

New Roth investors should put their money primarily into mutual or index funds. Here are two of the top brokerage firms that specialize in their own family of mutual funds and have built a reputable track record of solid returns. For new retirement account holders and those who are unsure about their investment approach, low cost, no load mutual funds are the less volatile and smarter way to invest for your future.

1) Fidelity - (Sign Up) - Fidelity Investments is where I chose to open my Roth IRA account and it's also the place where I manage my 401k. I like their clean and easy to use website interface and the fact that they have a very established track record. They offer a basic approach to opening a Traditional or Roth IRA. The minimum investment requirement is $2,500, but that amount is waived if you can commit to future automatic monthly contributions of $200 per month. For new and young investors who don't have $2,500 to invest right away, they can start out with just $200 and agree to put in $200 per month in the future.

Fidelity offers a huge variety of attractive mutual fund and index fund options, many of which have no transaction fees (although minimum balance requirements for Fidelity's index funds are rather high at $10,000). With a Fidelity account, you can trade Fidelity family funds for free, although there may be early redemption fees.

2) Vanguard - (Sign Up) - Vanguard is most well known for offering one of those lowest expense ratios for access to their family of Vanguard index funds. Opening a Roth with Vanguard will enable you to trade Vanguard mutual funds for free as well. While they ordinarily charge an annual $20 fee for each Vanguard fund account with a balance under $10,000, the maintenance fee is completely waived and eliminated if you simply register for account access on Vanguard.com and agree to accept electronic delivery of statements, reports, and other shareholder materials through Vanguard's e-service package.

For most Vanguard funds, the minimum investment requirement requirement is $3,000 per fund. However, with the broadly indexed Vanguard STAR Fund (VGSTX), the initial minimum balance requirement is only $1,000. The STAR Fund is a stable fund well suited for the beginner retirement account investor with limited funds to start. Once your investment has grown, you can always upgrade to one of the more targeted Vanguard Life Cycle Funds designed to suit investors depending according to their target retirement date. For me, I would choose the Target Retirement 2045 fund (VTIVX).

Vanguard expense ratios are quite low - a predictable trademark of most Vanguard funds. Vanguard is probably best suited for fund investors who want to concentrate their investing efforts primarily in index and mutual funds rather than individual stocks, the best course for the vast majority of investors.

Investing In Exchange Traded Funds and Individual Stocks - Another Approach For Roth IRA Investors

Currently there is an investment movement away from loaded investments and expensive adviser managed funds, and towards exchange traded funds (ETF). ETF's are attractive because not only do they track the diversified performance of broad indexes, they also offer very low expense ratios and may be easily traded like ordinary stocks. If ETF's are your intended approach, then you will need to find a Roth IRA discount broker that offers low per trade commissions and low fees. Here are a few low cost discount brokers that I either have accounts with or have had a history of positive trading experiences with:

Top Discount Broker Picks For Roth IRA Investors Who Want To Trade ETF's And Individual Stocks

1) Zecco - (Sign Up) - Zecco was one of the pioneers for the movement towards free stock trades. Although it has since scaled back the terms of its original free trade promotion, this discount broker still offers a great commission deal for free equity trades. Currently, account holders receive 10 free trades per month so long as they can maintain at least $2,500 in total account equity, which includes the total value of cash and stock positions. Otherwise, individual equity transactions for market and limit orders cost $4.50 per trade. Although there is technically no minimum balance investment requirement, if you want to take advantage of the free trade offer, you should maintain at least $2,500 in your account.

2) TradeKing - (Sign Up) - Notice: For a limited time only, TradeKing is offering new account applicants a free instant $50 bonus in their brokerage account when they fund and trade via the provided link). TradeKing is a popular deep discount broker that offers very low commission fees. Currently, each market and limit trade costs $4.95 per trade. There are no annual fees for IRA accounts and no minimum balance investment requirements to open a Roth account. For more background info about this deep discounter, check out my online review of TradeKing.

3)�� E-Trade - (Sign Up) - Right now, Etrade is offering 100 free stock and option trades (no commissions) for new IRA account registrations. This is a pretty amazing deal, especially coming from such an established brand name broker. Those who prefer no hassle financial accounts will also appreciate E-trade's no fee, no minimum balance approach to IRA's and Roth IRA's. This may be the best time to hop on board, while this particular limited time ETrade promotion is still active.

4) ShareBuilder - (Sign Up) - Exclusive $25 bonus offer for new accounts - ShareBuilder has established itself as a popular discount broker, offering comparatively low commission fees for equity transactions at $4 per trade through automatic investment plans, and $9.95 for regular real time market orders. There is no minimum investment balance requirement to open a new Roth or an ordinary brokerage account. The $25 annual fee is waived if you sign up for a trading plan other than their basic plan.

New ShareBuilder Promotion Codes: (Updated)

  • 25WOLS - Free $25 offer after sign up

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