Choosing a Roth IRA That’s Right for You – in 3.5 Easy Steps

If you’ve been looking for a good way to save for retirement, you can’t get much better than a Roth IRA.  A Roth IRA allows you to invest a portion of your annual income (up to $5,000 per year) in a variety of different things like stocks, bonds, CDs, mutual funds, or real estate.  Your investments earn interest, and when you retire, you can pull your money out – without paying taxes on it.  You can also pull your money out, penalty- and tax-free, to pay for a down payment on your first home, or higher education for your children or grandchildren (To qualify for these exceptions, you must have had your IRA for at least five years).

Bottom line?  If you don’t have a retirement plan (or you just want some extra financial security in the future), you should definitely check out a Roth IRA.

Not sure how to get started?  Here’s a quick, step-by-step guide to choosing the right Roth IRA.

Step 1:  Make sure you’re eligible.

Roth IRAs were devised by the U.S. government in 1997 as a way to help middle-class, working people save for retirement.  They’re not designed for gazillionaires, or for people who live off of trust funds – basically, they’re designed for average Americans with average incomes.

To qualify for a Roth IRA, you must meet two really basic requirements:

• You can’t make more than $105,000 a year if you’re single (or $173,000 a year if you’re married)
• You can only invest earned income – meaning, money you worked for.  You can’t invest inheritance money, student loan funds, or interest you made from other investments.

So, unless you’ve got a serious trust fund or earn a very high salary, you’re probably qualified for a Roth IRA.  Let’s move on to the next step.

Step 1.5:  Pay off your credit card debt.

Okay, so this one doesn’t have to do with a Roth IRA specifically – but before you invest in a retirement plan, I suggest that you pay down your debt first.  If you can’t pay all of it off, you should at the very least try to knock out a very large chunk of it.  I’d also recommend putting a few hundred dollars aside in an emergency fund, if you haven’t already done so.

Step 2:  Do some comparison shopping.

Once you’re financially ready for a Roth IRA, it’s time to take a look at your options.  You can enroll in a Roth IRA at a bank or credit union, or you can open one at a specialized financial institution, like a mutual fund company or a discount brokerage.

There are advantages and disadvantages to each one:

• Banks or credit unions may have lower minimum deposit requirements or they may offer lower fees – but they may also limit your investment options.  Some banks only allow you to use the money in your Roth IRA for, say, CDs.  If you’re looking for ways to diversify your investments, you might want to look at your other options.
• Mutual fund companies give you more ways to mix things up, but you might be looking at a significantly higher minimum initial investment (think a few thousand dollars, rather than a few hundred).  To learn more, check out the Roth IRA options at big-name companies like T. Rowe Price, Vanguard, or Fidelity Investments
• Discount brokerages may offer lower fees and lower initial investments — but they don’t always offer the level of financial advice or customer service you’d find with a mutual fund company or a bank.  Need a starting point? Take a look at Sharebuilder, Firstrade, or Zecco.

When shopping for a place to open a Roth IRA, I’d suggest looking at all three options closely — and be on the lookout for ways to sidestep fees or alternatives for very high minimum deposit requirements.  A mutual fund company, for example, might waive its $3,000 minimum deposit requirement if you commit to an automatic deposit of $200 a month.  Or, your bank or credit union may have special offers for existing customers, such as reduced (or nonexistent) annual fees.

Really, the best way to choose is to do lots of research.  If possible, try to talk to a real person and ask a few basic questions.

Once you’ve decided where you’d like to open a Roth IRA, there’s really only one step left . . .

Step 3:  Open your Roth IRA (and set up automated deposits!)

After you’ve done all of the preliminary research, opening a Roth IRA is super-easy – most banks, mutual fund companies, and brokerages give you the option of doing most (or all) of the application paperwork online.  The process will probably take about 30-45 minutes from start to finish.

Once you’ve opened your account, don’t forget to set up automated deposits.  The automated deposit feature is one of my favorite things about a Roth IRA – by putting your contributions on autopilot, you don’t have to remember to put money aside every month, and you’re less likely to decide to use that money on something else.