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What It Takes to Set Up a Roth IRA

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Once you make the decision as to how you will save toward retirement, you still have several steps to complete before savings can begin. Choosing a Roth IRA as an investment vehicle will offer substantial tax advantages on investments. But how do you decide where to open a Roth IRA or what investments should make up your retirement plan? Unlike shopping for the best CD or savings account, there are no “rates” which help a person decide which Roth IRA is right for them. Since the return on investment is determined not by the Roth IRA itself, but rather the investments which are housed within, it is important to know the best ways to set up your Roth IRA.

Do your homework

Before you start the process of opening a Roth IRA, you should first make sure you are eligible for this type of account. Become familiar with any income thresholds which may prevent you from owning this type of account. Also determine the IRA contribution limit (varies by age) and how much you intend to contribute each year. Ideally, you will max out your contributions to gain the most benefits, however not every person is in the position to make the maximum contributions. The amount of money available for investments and the length of time you plan on holding investments are important when determining your investment strategy. All of which play a key role in determining who is the best provider for your Roth IRA.

Investment strategy

An often overlooked or misunderstood aspect of the Roth IRA is how investments are handled. To be more specific, many individuals unfamiliar with the way a Roth IRA works believe the Roth IRA is the actual investment similar to a savings account or a mutual fund. This is not the case. The Roth IRA is simply where you place your investments which are then taxed in a specific manner. As such, it is the investments you choose to hold in your Roth IRA that ultimately make up your investment strategy.

Roth IRA owners can invest in any number of investments including certificates of deposit, bonds, individual stocks, ETFs, mutual funds and more. You may decide to focus on any of these investments. Your investment strategy will be determined by your risk tolerance, the amount of money you have available, how long you plan on holding the investment and other investments you may currently hold. Another factor to consider is how much time and effort you are willing to put into the management of your investments. After considering all of these factors and establishing an investment strategy, you can then focus on finding a provider.

Opening a Roth IRA

Armed with a well thought out investment strategy, finding a provider may be easier than you think. Banks, mutual fund companies, full service brokerage firms, insurance companies, and online discount brokers are all options to consider. Each offers their own pros and cons, many of which are relative to your investment strategy. For example a bank may be willing to get you started with a lower initial investment, however the investment options may be limited when compared to a mutual fund company. A full service brokerage firm may provide more flexibility in designing your own portfolio but you may pay more in fees. To find the right IRA provider you must consider your long term goals, how much money with which you have to work and the cost of opening and maintaining the Roth IRA. Once you have decided on a provider, opening your account will likely take the same amount of time as opening a regular checking or savings account. You will be required to fill out a few forms, provide your social security number and bank information and write a check to cover the initial deposit. From this point forward you are now the owner of a Roth IRA and can begin taking advantage of the many benefits associated with this type of retirement account.

Pinyo is the owner of Moolanomy Personal Finance Blog, which covers a wide range of personal finance and investing topics, with features that include reviews, comparison guides, and Q&A sections.


Published or updated March 30, 2011.
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{ 2 comments… read them below or add one }

1 Tiffany

Hi Ryan,
Plan to set up a Roth IRA account. Does this type of account ofter DEATH BENEFIT? And how it work?

Thanks
Tiffany

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2 Ryan Guina

Tiffany, you can specify the beneficiary when you set up your Roth IRA, or in your will or estate plan. There is no “death benefit” that pays out an additional sum upon death. Some insurance policies have that, but that is a different type of financial product.

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