Step 4: How To Open an IRA
It's really quite simple to open an IRA account -- easy as 1-2-3, as a matter of fact.
1. Find a discount broker
If you don't already have one, we suggest that you look into opening a discount brokerage account. In selecting a broker, there are a couple of things to consider:
Pay attention to fees: By law, an IRA trustee (which is what your broker will be) can charge an annual fee to maintain your IRA. Many charge around $30 a year to maintain an IRA, but some do not charge anything (which sounds pretty good to us Fools).
Consider trading commissions: How much are you paying each time you buy or sell a stock? Even if you employ a long-term buy-and-hold strategy, you've still got to fund your account. Make sure the bulk of your contribution is going toward your retirement nest egg, not commissions.
The reason for such a parsimonious attitude toward your IRA account is that your contributions are limited to $5,000. An extra $50 a year in transaction fees will, over time, reduce your account balance by thousands of dollars.
In other words, it pays to shop around. In retirement, those fees could mean the difference between serving festive drinks on your beachfront property in Tahiti, or sipping generic beer at your timeshare in Toledo.
For those eager to start saving for their slice of retirement paradise right now, we've put together a table that compares the IRA offerings of some popular discount brokerages. Compare their fees and services. And if you find a broker that looks good to you, go ahead and open an account or get more information!
2. Open and fund your account
So you've settled on a discount broker, and now you're ready to open your account. In most cases, your broker will have an online application you can complete. Sometimes you'll need to print this form out and mail it in with a check. A few brokers allow you to complete the entire application online, then electronically transfer funds from your checking or savings account.
3. Invest it!
Once your check or electronic transfer has cleared, you're ready to start investing. That means deciding which stocks or mutual funds you want to buy. (Hint: If you're new at this, or you just don't have the time to critically evaluate individual stocks, you might want to consider using an asset allocation strategy.)
When you decide what you're going to buy, you'll need to allow for any commissions. Let's say you're investing $5,000, and your broker charges $12 a trade. You decide to buy shares of a stock that's priced at $20 per share. Sure, you'd love to buy 250 shares and hit that $5,000 mark right on the nose. But you can't. You have to buy 249 shares, which comes to $4,980. That leaves you $20 ($5,000 - $4,980), out of which you'll pay your commission. Then you'll have $8 left in cash that you can include in your next trade.
By the way, if you already have an IRA set up with a more expensive broker or mutual fund company, or if you are rolling over a 401(k) to an IRA, your new broker will be happy (really, really happy) to assist you in transferring your funds to your new account.
And as always, if you're not sure you're getting the best deal, or just want to double-check, come on over to Rule Your Retirement and ask there. We'd love to see you there!