How to Start a Roth IRA and What to Look for in a Custodian

by Ryan Guina

Roth IRAs offer an excellent means of diversifying your retirement investments – not only for tax reasons, but because IRAs are Individual Retirement Accounts and you control the who, what, when, where, and why of your investment. Not being limited to a small segment of funds like you are in a 401k plan gives you the freedom to invest how and where you see fit.

How to Start a Roth IRA

Roth IRA Custodian

How to get started with your Roth IRA

Opening a Roth IRA is an easy process that only takes a few minutes. You will need to use an IRA custodian, which is an approved institution or individual that ensures your paperwork is correctly with the IRS. To open a Roth IRA, you only need to fill out a simple form and make an initial investment. If you already have an account and funds with the company, you can complete an IRA contribution in 5 minutes. It may take a little longer if you need to open an account with the financial institution, but the process is still easy. The following tips should help you find the best custodian for your Roth or Traditional IRA. Make sure to understand all the aspects of the Roth IRA before you begin, such as the Roth IRA withdrawal rules.

What You Should Look for When Opening a Roth IRA

Before opening a Roth IRA you will need to research the financial institution to determine which firm best meets your needs. After determining your investing style and your brokerage needs, you should look for a few other key features to ensure you get the best value and service for your investments:

  • Minimum initial investment and ongoing contributions. Some firms require a minimum investment to open an IRA, and others require a minimum purchase for continuing contributions. Make sure you can afford these minimums, and understand in full the details of the Roth IRA contribution limits.
  • Commissions and account fees. Some large brokerage firms do not charge fees or commissions on their in house mutual funds, though they may charge more than discount brokerage firms for individual stock trades or mutual funds outside their family of funds. Larger firms may also charge a custodial IRA fee if certain account minimums are not met. Online discount brokerage firms often have cheaper individual stock and ETF trades, and most do not charge a custodial IRA fee.
  • Fund options – variety and affordability. Make sure the brokerage firm that you use has a wide variety of mutual funds, ETFs, or other investment options to fit your investment needs. Be sure they charge a reasonable expense ratio.
  • Automatic contributions. Unless you can afford to max out your IRA with one contribution, you will probably want the option to set up automatic contributions so you can more easily invest. Most firms offer, and even encourage, automatic contributions.

Now that you have some criteria to look at, we can examine the most common types of financial institutions where you can open a Roth IRA account.

Selecting a Roth IRA Custodian

Many financial institutions are eligible to act as the custodian for your Roth IRA, including banks, mutual fund companies, and discount brokerage firms. You will want to open an account with the firm that best meets your investment needs. The details below offer more information about which types of investment opportunities you will find at these locations.

Banks – Generally Best for CD’s and Cash Equivalents

I don’t recommend using your bank to open an IRA account unless it bank offers a full brokerage service. This is because banks generally offer fewer investment options, which are usually limited to CDs, money market funds, and cash equivalents. Some banks offer other investment options, but they usually charge substantially higher fees than you can find at a brokerage firm like Fidelity or Vanguard, or a discount online brokerage like Scottrade, E*TRADE, or TradeKing. A bank is convenient, but rarely has the best investment options.

Full Service Mutual Fund Firms – Best for Larger Investment Accounts

Mutual fund firms typically have a wide variety of funds with low expense ratios, and are often the best place to purchase index funds, target date retirement funds, mutual funds and similar investments. Fidelity, Vanguard, Charles Schwab, and T. Rowe Price are good places to check out if you need to open an investment account. All of these companies offer Traditional and Roth IRAs along with many other investment options.

The downside is that many of these companies have higher minimums to invest in their funds and usually charge more for individual stock trades. However, some of these brokerage firms will waive the minimums for IRAs if you can commit to a minimum monthly investment. The same goes for IRA custodial fees, which may be waived with recurring investments or a minimum account balance.

Online Discount Brokerages – Best for Active Traders or Small Accounts

If you like to dabble in individual stocks or prefer a more hands on approach, then I recommend looking into discount online brokerages. Discount brokerages give you access to stock trades, options trades, Exchange Traded Funds (ETFs), mutual funds and other investments. You can also make individual stock trades in the $2 – $10 range, which is usually much cheaper than making stock trades at the mutual fund firms listed above. While you may find that discount brokerages offer fewer mutual funds than the large brokerage houses, you can usually find a comparable ETF with similar or lower expense ratios.

How to choose a discount brokerage. Here are tips on how to choose an online brokerage, along with reviews of several top discount brokerage firms.

Robo Advisors – Best for Beginner and Hands Off Investors

Robo advisors are relatively new to the investment arena, but they offer a unique feature set. You choose your risk tolerance, and the investment company will automatically take care of the asset allocation for you. This set it and forget it mentality makes it easy to be a hands off investor. What you give up in control, you make up for in having the peace of mind that your investment asset allocation will remain where you set it, regardless of how the markets perform. That takes the guess work out of investing and removes the temptation of trying to time the market. Here are some more benefits of investing with robo advisors.

Some of the top Robo Advisors include Betterment, Wealth Front, and Future Advisor.

Now that you know what you are looking for when opening a Roth IRA, you can go find the best brokerage for your needs. Or, stay tuned for tomorrow’s article which features a list of the best mutual fund firms and discount brokerages to open a Roth IRA.

*Note: The same criteria apply when opening a Traditional IRA, just be sure to verify your income against the contribution limits as mentioned above.

Published or updated January 4, 2017.
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{ 11 comments… read them below or add one }

1 Curious Cat Investing Blog

Roth IRAs are a great tool for wise personal finance planing. Vanguard is a great choice for most people due to their excellent low fee mutual funds.


2 Hank

Another great option for a Roth IRA custodian is the mutual fund company itself if you want to invest in an actively managed fund. For example, I fund companies like Dodge and Cox can be the custodian for you if you are only investing in their family of mutual funds. The main downside to that option is that you will have IRA accounts scattered all over the place instead of consolidated at an investment company such as Fidelity.


3 Ryan

Very true, Hank. You can do the same thing with Dividend Re-Investment Plans (DRIPs). But there is something to be said about keeping your investments in as few places as possible, as well as the flexibility of making changes without needing to do an IRA rollover.


4 bridget

Ryan can you help me with the IRA thing. i want to be rich!


5 Blue Spyder

I took mine to Navy Federal, I’m pretty happy, my traditional is with the investment division while my roth is with the credit union


6 Sassy

What about opening a Roth IRA with an insurance company, such as State Farm? Is this a good idea? Thanks.


7 Ryan Guina

Sassy, insurance companies sometimes offer good investment opportunities, but it’s a good idea to research the investment before signing up. To do so, get the fund prospectus and compare it to similar funds, looking at the types of investments held in the fund, the management fees, and similar features. You will often find that it is better in the long run to go with an index fund from one of the large mutual fund firms, as they offer similar or better performance to many managed funds at a fraction of the expense, which lets your money work harder and longer for you in the long run.


8 Katherine

I am over 50 and have just open my very first ROTH IRA account with a bank without much knowledge. Now after reading your great articles I think it can serve me better if I transfer mine to Vanguard because at my age I want to invest with moderate risk in funds than just in CDs or money market ACs. Is such a transfer a wise choice? How can I do that and will I need to pay any fee?


9 Ryan Guina

Katherine, Vanguard is extremely helpful with transferring IRAs, and can walk you through the process. All you would need to do is fill out the paperwork (which they can help you understand), sign the forms, then send them to Vanguard. There are no fees from Vanguard to transfer your funds, however, your bank may charge some fees if you have CDs that are ending early. CDs often charge 3-6 months interest if broken before their term. However, with rates as low as they are, that may not amount to a large penalty. My recommendation is to look into moving your IRAs if you believe Vanguard offers funds which are better suited for your needs.


10 Dennis

I’m 27 years old and just started my career. I’m interested in opening a ROTH IRA, but I don’t know much about this AT ALL. Can you point me to the right direction!?


11 Ryan Guina

Dennis, here is a good resource to get started with an IRA. As for where to actually invest your funds, that depends on what other investments you have, if any, your risk tolerance, and your investment timeline. Here is a guide to get started with investing. It’s not a bad idea to get your money in the market slowly and learn as much as you can about investing so you can make more informed decisions as you go. Best of luck.


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