Opening an Account
If you can, choose an online broker
Now that you’ve decided to open a Roth IRA, you’d probably like to know how to open one. The mechanics of opening an account are fairly simple, but first you need to decide where you want to park your money. That takes a bit more work, but if you follow a few principles, you’ll be investing–wisely–in no time.
It’s difficult these days to find a bank, discount broker or mutual fund company that doesn’t offer the option to open and access a Roth IRA account online. If you have access to a computer and a basic level of Internet skill, this is unquestionably the way to go. If you don’t, you’ll need to head to your local bank branch or brokerage firm and sign up in person (how decidedly 20th-century of you). >
Given the many advantages—in time, convenience and fees—of working with online banks and brokerages, we’ll focus on that approach. The number of institutions offering online access is far too big to list, but you likely already know the names of some of the bigger names: brokerage firms such as Schwab and TD Ameritrade, mutual funds such as Fidelity and Vanguard; and banks such as Bank of America and ING Direct. If one of the big firms isn’t in your town, your local bank most likely offers retirement accounts. Given their size, however, their online offerings may be more limited and their fees may be higher.
Repeat after me: I will not pay high fees.
Now say it again.
You have enough to worry about when choosing where to put your money to work to get a good return. Don’t make it even more difficult by signing up for an account that charges you a lot of money simply for the privilege of having an account.
Other than investing all your money into a company that is developing a better VCR, paying high fees is a sure-fire way to lower your returns. Paying some fees is inevitable; it’s one of the ways a financial institution makes money. Some, however, are greedier than others.
Fees come in many forms: account maintenance, transaction, trading, low account balance, inactivity, and many others. If a bank, mutual fund or brokerage can think of a fee, they’re likely to charge it. To minimize them, you first have to get a sense of what type of account holder you’re likely to be.
Things to ask yourself:
• Are you likely to do a lot of trading of individual stocks and bonds?
• Are you more of a buy-and-hold investor?
• Are you going to invest in mutual funds or exchange-traded funds?
• Do you only have a small amount of money to invest?
• Do you want help picking investments, or are you comfortable making your own decisions?
• Do you tend to use investment research to guide your decisions?
Depending on the answers, you can categorize yourself in one or more of the following categories, each with their own rules for avoiding fees.
Sophisticated, active investor: go for an account with low per-trade fees. Some firms will even lower trading fees after a certain number per month, quarter or year, and will offer free access to proprietary research.
Buy-and-holder: avoid accounts with high inactivity fees.
Mutual fund investor: you’ll want to pay particular attention to the fees charged by the individual funds that you invest in (these may be different than more general, administrative fees that your brokerage firm will charge for holding any type of retirement account). Mutual fund fees include account management, exchange, redemption and so-called 12b-1 fees. Account maintenance, management and 12b-1 fees are important regardless of whether you actively move in and out of different mutual funds. Mutual fund companies charge these fees to all investors to cover the cost of picking investments, marketing the fund, and general administration. You may pay exchange or redemption fees when you switch your money from one fund to another within the same fund company or when you sell your shares. These fees are most significant if you plan to move in and out of funds with some regularity. Sites such as www.morningstar.com can help you choose a low-fee fund that’s right for you.
The hand-holder: If you’d like help from a professional in setting up and managing your retirement account, be prepared to pay for it. The ideal is to find a good financial advisor who charges by the hour or a flat annual fee to manage your account. Those who get commissions based on your trading activity have an incentive to “churn” your assets; in other words, they get paid by how actively they invest, rather than how well. Other firms charge an annual management fee, often one percent of the amount in the account. It’s only worth it if, over time, the manager’s returns exceed market averages by more than one percent. Otherwise, you may want to just invest in low-cost stock and bond index funds that mimic overall market performance—rather than trying to beat it.