Monday, June 22, 2015

How and Why You Should Open a Roth IRA

In the decade-and-a-half since their introduction, people have come to appreciate the incredible power of the Roth Individual Retirement Account (IRA).

Roth IRAs allow individuals to save money for their retirement and let it grow tax free.

Yup, you heard correctly; tax free. Roth IRAs are retirement accounts that are maintained by a registered financial institution, but created and directed entirely by you, the investor. These accounts can contain any number of investments including Certificates of Deposit, stocks, bonds, mutual funds, even real estate.

You can open a Roth IRA through a brokerage firm (such as Charles Schwab, E-Trade, TD Ameritrade), a Mutual Fund Company (exp. Janus, Fidelity, Vanguard), Banking Institution (Wachovia, Bank of America, or Washington Mutual) or diversified financial company (Citigroup, ING).

These accounts can be opened in person, via telephone, or even online.

It pays to do your research to find out each companies specific rules surrounding opening a Roth IRA, and what the associated fees will be for an account.

And much of this can be done right from your computer as many firms allow you to open a Roth IRA through their website in just a matter of minutes.

As you are investigating where to open your Roth IRA, take note of all the various fees that a company may charge. Yearly maintenance fees, account set up charges, and annual fees based on the total value of your Roth IRA are all common fees associated with maintaining a Roth IRA.

In order to maximize the growth of your Roth IRA, focus on keeping account fees to a minimum as they will eat away at your yearly rate of return. If fees of some sort are required, make sure that you have the option to pay these fees from funds separate from your Roth IRA.

Paying these fees with monies outside of your Roth IRA this preserve your yearly rate of return from being eroded away by fees.

Once you open your Roth IRA, you'll probably have to make an initial deposit, typically $500 or $1,000. Many companies though will waive that requirement if you set up an automatic monthly withdrawal program from a checking or savings account.

This is a great way to not only fund your Roth IRA, but to take advantage of dollar cost averaging, the concept that regular periodic investments will outperform attempts to buy at the lowest price. Setting up a system like this is a great way to put your retirement on "Autopilot", set it up and forget about it.

Bear in mind that the yearly contribution limit to a Roth IRA is $5,500 (for tax year 2014 and 2015) and $6,500 if you’re over age 50.

If you have decided to grab your retirement bull by the horns, opening a Roth IRA is a great way to start.

Ask friends and colleagues for recommendations of where they maintain their retirement accounts, and by all means, take advantage of this important tool for retirement.

Please remember to run all investment ideas through your personal investment adviser and your Certified Public Accountant for the tax implications of your investment decisions.

Image Credit: Wikimedia Commons CCA 3.0 Author Dwight Burdette

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