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How to open a Roth IRA

Published: Friday, March 22, 2019 @ 12:22 PM

Do you want to open a Roth IRA, but not sure how or where to get started?

In this article, we’ll walk you through the process and take a look at some good low-cost investments for your Roth IRA once you open it!

RELATED: The #1 mistake people make when opening an investment account

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Confused about opening a Roth IRA? Here’s what you need to know

There’s a lot of confusion about what a Roth IRA and a traditional IRA even are. Some people think a Roth IRA is, in and of itself, an investment. But that’s not the case.

Think of it like this: IRAs, Roth IRAs and 401(k)s are like an empty shell or a vacant house. Nobody buys a house and just leaves it sitting there unfurnished. You’ve got to put some furniture in the house!

The “furniture” you put in your house is what you put inside the shell of your Roth or traditional IRA.

It can include investments like actively picked individual stocks and bonds or passively managed groups of investments — like mutual funds, index funds and exchange-traded funds, to name a few of the more popular options.

Money expert Clark Howard has a strong bias against actively managed investments. He’s all about you buying low-cost index funds that track broad market indices, not trying to pick individual stocks.

How to open a Roth IRA: Table of contents

4 things to know before you open a Roth IRA

OK, let’s take a look at steps you need to take leading up to opening a Roth IRA or even a traditional IRA. (Editor’s note: To understand the difference between the two, see this article.)

1. Make sure you qualify

You can only open a traditional IRA or a Roth IRA if you have earned income in a given year. If you didn’t earn any money, you can’t open one of these accounts.

2. Make sure you know how much you can invest

Contribution limits can vary from year to year and generally go higher over time. For 2019, you can contribute up to $6,000 to a Roth IRA.

If you’re over age 50, you can play catch-up and contribute an additional $1,000 on top of that.

3. Make sure you have the funds available for deposit

Generally, when you’re opening an account with a brokerage online, they’ll make a small ACH deposit of a few cents to your bank account. Then you have to log back into your new brokerage account and report the exact amount they deposited — which they’ll promptly take back.

This is all done to verify your bank account as the legitimate and official way you’ll fund your brokerage account.

Once you’ve established the connection between the two accounts, it’s just a matter of having the money in your bank account ready to transfer to your newly established brokerage account to be invested.

4. Make sure you actually invest the money you deposit! 

Many first-time investors make a common error when they fund a brokerage account: They leave their funds in a temporary settlement account without actually taking the additional step of investing the money!

In that case, their money just sits there earning paltry interest in the settlement fund. They miss out on the chance to earn (potentially) bigger bucks in the stock market.

We’ve got a full rundown of this problem and what you need to watch out for here.

So, without further ado, let’s get to some low-cost index funds you may want to consider putting in your newly opened Roth IRA or traditional IRA…

Vanguard

The Vanguard Group is a registered investment advisory based in Valley Forge, Pennsylvania with $5.3 trillion in global assets under management, as of September 30, 2018.

Vanguard is known for its low fees and unique model where the people who own its funds — including, potentially, you! — are the owners of the company.

“Our unique client-owned structure allows us to return profits to our fund shareholders in the form of lower expenses,” Vanguard notes online. “Low costs help our clients keep more of their returns, which can help them earn more money over time.”

How to open a Vanguard IRA or Roth IRA

Where to start: You can open an IRA or Roth IRA by visiting this page.

Minimums: You can begin investing with $1,000 for select funds. However, we should note most funds require a minimum of $3,000.

Below are a couple of Vanguard investments that Clark thinks can serve nicely as the cornerstone of any investment portfolio.

Vanguard Total Stock Market Index Fund

Name Ticker symbol Expenses Minimums
Vanguard Total Stock Market Index Fund Admiral Shares VTSAX 0.04% $3,000

With this investment, you get exposure to “the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks,” according to Vanguard.

Here are the 10 largest individual stock holdings you’ll own a piece of when you buy into the Vanguard Total Stock Market Index Fund, as of 02/28/2019:

1. Microsoft Corp.
2. Apple Inc.
3. Amazon.com Inc.
4. Alphabet Inc. (aka Google)
5. Berkshire Hathaway Inc.
6. Facebook Inc.
7. Johnson & Johnson
8. JPMorgan Chase & Co.
9. Exxon Mobil Corp.
10. Visa Inc.

Vanguard STAR Fund

Name Ticker symbol Expenses Minimums
Vanguard STAR Fund VGSTX 0.31% $1,000

The Vanguard STAR Fund is like a superfund, i.e. a fund comprised of other funds. Through 11 underlying actively managed Vanguard funds, the STAR Fund gives you access to a moderate-risk balanced portfolio of 60% stocks and 40% bonds.

Here are the 11 underlying funds you buy into when you buy the STAR Fund, as of 02/28/19:

1. Vanguard Windsor II Fund
2. Vanguard GNMA Fund Investor Shares
3. Vanguard Short-Term Investment-Grade Fund Investor Shares
4. Vanguard Long-Term Investment-Grade Fund Investor Shares
5. Vanguard International Growth Fund
6. Vanguard International Value Fund
7. Vanguard Windsor Fund
8. Vanguard US Growth Fund
9. Vanguard PRIMECAP Fund
10. Vanguard Morgan Growth Fund
11. Vanguard Explorer Fund Investor Shares

Fidelity 

Fidelity Investments is a multinational financial services corporation based in Boston, Massachusetts with $2.46 trillion in assets under management as of March 2018.

Recently, Fidelity has differentiated itself from competitors by offering the industry’s first-ever no-fee index funds. That means every single penny you invest goes toward building long-term wealth — instead of getting eaten up by pesky fees!

How to open a Fidelity IRA or Roth IRA

Where to start: You can open an IRA or Roth IRA by visiting this page.

Minimums: You can begin investing with no minimum in a small handful of funds! However, some funds require a minimum of $2,500.

Fidelity also distinguishes itself by offering 10 regional offices and more than 190 financial planning offices, unlike Vanguard, which has no branch offices for customers to walk into.

So that’s another way to open a Fidelity IRA or Roth IRA — showing up in person to get started! You can see a complete list of Fidelity branch locations here.

Below are a few Fidelity investments that Clark thinks can serve nicely as the cornerstone of any investment portfolio — all of which you can invest in with no minimums!

Fidelity Four-in-One Index Fund

Name Ticker symbol Expenses Minimums
Fidelity Four-in-One Index Fund FFNOX 0.13% N/A

The Fidelity Four-in-One is a conglomeration of four underlying Fidelity stock and bond index funds. It aims to provide investors with a broadly diversified, index-based investment.

Here are the four underlying funds that comprise the Four-in-One Index, as of 01/31/2019:

  • Fidelity 500 Index Fund
  • Fidelity Extended Market Index Fund
  • Fidelity International Index Fund
  • Fidelity U.S. Bond Index Fund

Fidelity ZERO Total Market Index Fund 

Name Ticker symbol Expenses Minimums
Fidelity ZERO Total Market Index Fund FZROX 0.00% N/A

The big draw with this Fidelity ZERO fund and the one listed below is in the name. That’s right, this fund has zero minimums for account opening, zero investment minimums, zero account fees and zero domestic money movement fees!

Here are the 10 largest individual stock holdings you’ll own a piece of when you buy into the Fidelity ZERO Total Market Index Fund, as of 12/31/2018:

1. Apple Inc.
2. Microsoft Corp.
3. Amazon.com Inc.
4. Berkshire Hathaway Inc.
5. Johnson & Johnson
6. JPMorgan Chase & Co.
7. Alphabet (aka Google – Class C shares)
8. Facebook Inc.
9. Alphabet (Class A shares)
10. Exxon Mobil Corp.

Fidelity ZERO International Index Fund 

Name Ticker symbol Expenses Minimums
Fidelity ZERO International Index Fund FZILX 0.00% N/A

Unlike its predecessor, the Fidelity ZERO International Index Fund looks outside the borders of the United States for investments.

In reality, the bulk of the growth of capitalism is happening overseas. So investors who shun international equities like the ones offered here do so at the risk of harming their portfolio’s long-term growth prospects!

Here are the 10 largest international stock holdings you’ll own a piece of when you buy into the Fidelity ZERO International Index Fund, as of 12/31/2018:

  1. Nestle
  2. Novartis
  3. Tencent Holdings
  4. Samsung Electronics Co.
  5. Roche Holdings
  6. Toyota Motor Corp.
  7. HSBC Holdings
  8. Alibaba Group
  9. Royal Dutch Shell
  10. Taiwan Semiconductor Manufacturing Co.

Again, just like its predecessor, this fund has ZERO minimums for account opening, investment minimums, account fees and domestic money movement fees.

Charles Schwab 

Charles Schwab is a bank and brokerage firm based in San Francisco, California with $3.25 trillion in assets under management as of December 31, 2018.

“Chuck” — as the outfit came to be known after an one-time “Ask Chuck” advertising campaign — has long made low investment costs a centerpiece of its corporate mission.

How to open a Schwab IRA or Roth IRA

Where to start: You can open an IRA or Roth IRA by visiting this page.

Minimums: You can begin investing with as little as $1!

Charles Schwab boasts more than 300 locations across the country. So if you like the human touch when you’re opening an IRA or Roth IRA, Schwab offers the biggest footprint of all the players on this list.

See a complete list of office locations here.

Below are a few Schwab investments that Clark thinks can serve nicely as the cornerstone of any investment portfolio — and it only takes a single $1 bill to get started investing in any of them!

Schwab Total Stock Market Index Fund

Name Ticker symbol Expenses Minimums
Schwab Total Stock Market Index Fund SWTSX 0.03% $1

This investment gives you exposure to some 5,000 companies across the spectrum of capitalism. The goal is to track the return of the total U.S. stock market.

Here are the 10 largest individual stock holdings you’ll own a piece of when you buy into the Schwab Total Stock Market Index Fund, as of 02/28/2019:

1. Microsoft Corp.
2. Apple Inc.
3. Amazon.com Inc.
4. Berkshire Hathaway Inc.
5. Facebook Inc.
6. Johnson & Johnson
7. JPMorgan Chase & Co.
8. Alphabet (aka Google – Class C shares)
9. Alphabet (Class A shares)
10. Exxon Mobil Corp.

Schwab International Index Fund

Name Ticker symbol Expenses Minimums
Schwab International Index Fund SWISX 0.06% $1

This fund invests in nearly 1,000 publicly traded companies from select countries outside the U.S.

Here are the 10 largest international stock holdings you’ll own a piece of when you buy into the Schwab International Index Fund, as of 02/28/2019:

  1. Nestle
  2. Novartis
  3. Roche Holdings
  4. HSBC Holdings
  5. BP
  6. Royal Dutch Shell (Class A shares)
  7. Toyota Motor Corp.
  8. Total SA
  9. AIA Group LTD.
  10. Royal Dutch Shell (Class B shares)
  11. Taiwan Semiconductor Manufacturing Co.

Schwab Small Cap Index Fund

Name Ticker symbol Expenses Minimums
Schwab Small Cap Index Fund SWSSX 0.04% $1

This fund invests in 1,000 smaller publicly traded U.S. companies and even one futures index.

Here are the 10 largest small cap holdings you’ll own a piece of when you buy into the Schwab Small Cap Index Fund, as of 02/28/2019:

  1. E-mini Russell 2000 Index Futures Quotes (Learn more here)
  2. Etsy Inc.
  3. The Trade Desk Inc.
  4. Five Below Inc.
  5. Integrated Device Technology Inc.
  6. HubSpot Inc.
  7. Ciena Corp.
  8. Cree Inc.
  9. Primerica Inc.
  10. Planet Fitness Inc.

Final thought

Getting started investing for your future doesn’t need to be hard, difficult or even expensive!

Once you know how to open a Roth IRA, you’re well on your way to building a more financially secure future for yourself and your family.

More personal finance stories on Clark.com:

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