One of the top ten questions I’m asked about money is, “How do I start a Roth IRA.”
Just about everyone is surprised, when I explain how easy the process is. Turns out, you can start a Roth IRA in about 20 minutes. Even if you don’t know a thing about investing.
The purpose of this post is to detail the process out for those just getting started.
How do I start a Roth IRA? | Before You Begin
Before starting, go through the following mini checklist to determine if starting a Roth IRA is best for you:
- Do you have outstanding high interest debt such as credit card debt? If you still have high-interest debt, it’s best to pay that off before investing.
- Do you have a small cash reserve? The goal is to have at least $1,000 set aside for emergencies before investing.
- Can you still contribute to an employer match in your 401(k)? Your employer match is the highest returning investment there is. Maximize that first, and then move onto a Roth IRA.
- Do you qualify for a Roth IRA? The big exception is for those who have an incomes over $100,000. Most everyone else, is eligible.
How do I start a Roth IRA? | What You Need
To make the process as easy as possible, have everything by your side before you begin. You will need the following:
- 20 Minutes
- Some money but not much
- Social Security #
- Bank Account Information (A copy of your check will work)
How do I start a Roth IRA? | The Four Step Process
- Go to Sharebuilder. (There other options out there besides Sharebuilder to start a Roth IRA. In my opinion, for the majority of young adults Sharebuilder is a fine choice. )
- Sign up for a Roth IRA account
- Choose the $4 investment plan. Link your bank account information so you can automate your investing.
- For your investment, choose a low expense target retirement ETF that corresponds with your target retirement date. Vanguard’s funds are a good place to start. You can change this later on. The goal now is to get started.
That’s it. You just opened a Roth IRA in less than 20 minutes.
How do I start a Roth IRA? | What’s Next?
The hardest part mentally is over. You committed to saving for you future. It should feel pretty good. The rest is easy.
Above, I recommended a Target Retirement Fund for your allocation. The goal was to get you started, not to overwhelm you. For 80% of you, this allocation and diversification is perfect. (I invest in the Vanguard 2050 retirement fund myself) However, some might need a few adjustments to this allocation. Therefore, pick up an investment book such as the Boglehead’s Guide to Investing to make sure you’re on the right track.
Last, I find it helpful to have an investment policy statement. This is a single document that you can refer to about asset allocation and rebalancing.
Good luck!
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Photo by: Rennett Stowe
{ 12 comments… read them below or add one }
You suggest using Sharebuilder, and then purchasing Vanguard funds. I wonder why you didn’t suggest going through Vanguard to set up the Roth IRA in the first place? Is it easier to set up the Roth IRA in Sharebuilder? Does Vanguard not offer Roth’s?
@Shawn – Vanguard has a $3,000 minimum. The majority of the readers, can’t afford to make a one time $3,000 contribution. Vanguard does offer Roth accounts.
I’m excited to be starting my Roth IRA in 2011. I have the account set up but will start contributing in January. Did it through Zecco.
Great Briana. Never have went through Zecco before. Heard some good things about it, though.
Just a reminder, make sure you contribute to your 2010 contributions if you’re starting in January.
Wow. Timely post. Setup my Roth IRA last week and just sealed an evelope to mail to Vanguard to finalize the process. I feel empowered and I’m contributing to max for 2010.
That’s great Nicky. Good luck with your Roth IRA.
Hey RJ,
I already have a Roth set up, but I wanted to ask you on a separate topic about Roth 401Ks. Is this something you can talk about as it relates to young 20-somethings? Is it almost always a good idea and how do you go about determining whether it’s the right fit for you compared to a traditional 401K? Thanks!
@Eric – Sorry for the delayed response. I didn’t see your question until now.
As a younger guy, I assume you expect your income to go up in the future. Therefore, paying taxes now in a Roth 401(k) makes sense, over delaying taxes in the future.
Schawb has a good calculator to determine, which is better. http://scrs.schwab.com/tools/schwab_roth_401k_calc.htm
@RJ – No problem. I figured you’d eventually get around to me.
Thanks for answering my question. Initially, I thought it was a pretty straightforward argument too for a younger person to fund a Roth 401K. Then, I stumbled upon this blog post ( http://thefinancebuff.com/case-against-roth-401k.html ), which gave some convincing(?) counter-arguments. What do you think about the points brought up in that blog post?
@Eric – I think I’m going to write an entire post on the concept. There’s a lot that goes into the decision.
Thanks RJ! Honestly, I was secretly hoping for a post from you on it. Can’t wait to hear everything you have to say.
Hi John….what if I filed my taxes already and contributed an extra amount to my 2010 Roth IRA account aftewards. Do I need to have an amended return filed due to that or can I just take money out and put it towards my 2011 Roth IRA account? Thanks c.r.