Starting a Roth IRA can easily be the single best choice you’ve made of your entire life. Well, other than ordering a Double Double from In-N-Out Burger, of course. –if you haven’t tried it, you’ll just have to take my word for it :) Maybe you want to open a Roth IRA, but don’t because you think it takes a large chunk of money to get one started.
Guess what? It doesn’t. This is a common misconception that I run into with many investors wanting to get started but thinking they just don’t have enough. I’m here to tell you how easy it is to open a Roth IRA and how a little bit of money can go a long way to receiving tax free money at retirement.
1. How much can you contribute to a Roth IRA?
For the 2009 and 2010 tax year, the Roth IRA allows you to contribute up to $5,000, if you’re under the age of 50, or $6,000 if you’re over the age of 50. Keep in mind that you have from January 1st until April 15th of the following year to be able to contribute that amount.
For example, for the 2009 tax year, you could make a contribution to the Roth on April 15, 2010 and still have it qualify for the 2009 tax year. If you’re a new investor, $5,000 seems like a pretty large amount to get going. You don’t have to put the $5,000 all at one time. Instead, you can do a monthly contribution. To be able to max out $5,000 over a 12 month period would take $416.67 to do so.
Once again, you don’t have to max out the Roth IRA. It’s not a requirement, but if you can swing it, I would definitely encourage you to do so. But, if you can only afford $25 a month, for example, that would allow you to get a good start going on the Roth. The saying “every little thing counts’ definitely hold true here.
2. Deadline to Open a Roth IRA
You don’t have to have the Roth IRA account opened in the tax year you’re looking to contribute. For example, if you decide in February of 2010 that you want to open a Roth IRA, you can open a Roth and then characterize the contribution for the 2009 tax year.
For 2010, you have up until April 15th of 2011 to be able to put as much in for that 2010 tax year. The key is is informing the financial institution that holds your IRA how to “code” the contribution. Even if a mistake is made, the IRS can be fairly lenient in letting you fix the problem.
3. How Much to Start a Roth IRA
How much money it takes to start a Roth IRA all depends on where you go to open it. Most brick and mortar brokerage firms don’t have a minimum to “open the IRA” but you’ll have to at least cover the investment you are purchasing. As an example, if you want buy 100 shares of stock XYZ, you best have enough to cover the cost of the shares plus any commissions. This applies to my firm and my broker/dealer LPL Financial.
If you want to open a Roth IRA at a bank and/or a credit union, you’ll most likely be limited to just savings and CD’s as your investment options. Curious to know their limits, I called our local credit union to see what there minimums were. If you plan on just sticking with savings, you’ll need at least $200 to get going. If you want to purchase a CD, you’ll need a minimum of $1,000. Be sure to double check with your financial institution to see what their policies are.
Online brokerages will vary. I’ve seen some online outfits require anywhere from $250 to as much as $1000. Many investment companies may allow no money up front so as long as you set up an automatic withdrawal from a checking or savings accounts. You’ll have to double check with the desired company to see what their limits are.
4. Dollar cost averaging.
By investing on a monthly basis instead of doing the one time lump sum contribution, this will allow you to participate in what’s called dollar cost averaging. A quick disclaimer: dollar cost averaging does not guarantee higher rate of returns over the long-term. In times of volatility, it can prove to be helpful Here’s an example.
Benefits of Dollar Cost Averaging Month Share Price (In $) Shares Bought
January 15 3.3
February 13 3.8
March 12 4.2
April 14 3.6
May 13 3.8
June 12 4.2
July 13 3.8
August 14 3.6
September 16 3.3
October 16 3.1
November 17 2.9
December 16 3.1
Total Shares 42.7
Avg. Price Per Share $14.25
Avg. Cost Per Share $14.05
Dollar cost averaging is a technique often used in which investments of defined amounts are made on a regular basis. As a long-term, disciplined strategy, DCA can help you take advantage of the benefits of compounding to potentially build a sizable sum. Inside a Roth IRA, it’s that much sweeter.
Haven’t Started a Roth IRA Yet?
What are you waiting for? Stop reading this article and investigate your options now! Do not pass go. Do not collect your $200. Get off your butt and start investing for retirement and consider opening a Roth IRA today!
Company Stock/ETF Transaction Cost for Average Investor (Online) Mutual Fund Transaction Cost (Online) Minimum to Open
Scottrade $7.00 $17.00 $500.00
E*TRADE $9.99 $19.99 $0.00
TD Ameritrade $9.95 $49.99 $0.00
ShareBuilder $4 (automatic investment) or $9.95 per trade $4 (automatic investment) or $19.95 per trade $0.00
OptionsHouse $3.95 $9.95 $1,000
TradeKing $4.95 $9.95 $0.00
Schwab $8.95 $76.00 $1,000
*Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted. A Roth IRA should be considered as an option but not everyone reading this blog should open one.