You finally reached that point in your life where you know that you need to start investing, but the whole process intimidates you. Stocks, bonds, diversifying, the list of confusing terms goes on and on. You shouldn’t be scared to dive into the investing pool, it’s easier than you think.
Many young investors falsely believe they since they’re not Mark Zuckerberg they don’t meet the minimum bankroll to get started.
I am constantly asked,
“How much does it take to open an IRA?”
Because of all the complicated rules and regulations surrounding IRA accounts, many people are to scared to even approach the idea of opening their own. But, if you are a young investor and determined to start saving for your financial future, you’re in for a treat.
With most IRAs (traditional or Roth), there are no minimums.
Yup, that’s right. Zero. Nada. Nothing.
I’m sure you are stunned to hear this. Let’s see if I can add some clarity to the young investors who are looking to open an IRA and get started saving for their financial future.
A large percentage of Americans are going through their adult lives without an adequate retirement account or investment portfolio. In fact, more than 30% of Americans do not have retirement savings, and of that 30%, a quarter of those Americans are already over the age of 45. IRAs (particularly Roths) are one of the best ways to jumpstart your retirement savings account and your investment portfolio.
How Much Does it Really Take?
When most people think of investing, they think of the big Wall Street firms where their investors have millions upon millions of dollars. While some of these big Wall Street firms may have their own minimums, typically to open an IRA, there isn’t one.
For example, you could go to a bank, a local Edward Jones office, or even online, and there are plenty of places where you can start an IRA with no minimum.
Scottrade, a popular online brokerage based out of St. Louis, Missouri, states on their website that there’s $500 minimum to open an account. The reality is that that’s not the case. That’s just a suggested amount, so that way when you make your first deposit, you actually have enough money to make your first trade.
Why no minimums?
An individual is only allowed to put up to $5,500 into an IRA if you’re under the age of 50 (as of 2013), $6,500 if you’re over the age of 50, into an IRA each year. There is no Roth IRA minimum requirement for how much you must put in. You can put in as little as you want to. That’s just the absolute most that you can. If you only wanted to put $50 into an IRA, you could do so.
Where I think most of the confusion comes into play is making the actual investments inside the IRA. Putting money into an IRA isn’t investing, it’s only the first step. The IRA is only a vehicle for investing the money.
For example, if you only put in $100 into your IRA and you want to buy a share of Google stock, it’s not going to happen. With Google’s stock price currently being above $600 per share, you’re one-sixth away of being able to own that one share. But with that $100 you can buy stock in businesses that have stocks for much less.
Whether you’re looking to buy an individual stock, an ETF, or an individual bond, you must have at least that much in your IRA before you can buy that investment.
Mutual Funds May Have Minimums
Many times when someone asks, “How much do you need to start investing?” they are talking about getting into mutual funds. If you’re looking to purchase mutual funds inside your IRA, a lot of mutual funds will have a minimums deposit amount to get started. This depends completely on the fund company. I’ve seen some mutual funds that have as little as $100 minimum investment and I’ve some as high as $25,000, sometimes $50,000 before you can even get in. If you are starting out with investing and $100 seems like a comfortable place to begin, check out my recommendations on how to invest $100.
To make mutual funds more accessible for the new investor, some mutual funds will allow you to get in even if you don’t meet the minimum. They’ll do this only if you set up an automatic purchase that comes out of your checking or savings account that purchases the fund each and every month.
Starting out this is how I was able to invest into mutual funds. I was having $50/month taken out of my checking account and being split between two mutual funds.
This is a way that I commonly suggest for new investors to get started with an IRA or any mutual fund investing since it prevents less of a chance of you not making that investment for the month because you wanted to go buy something that you don’t need. Having the money automatically deposited into the mutual fund takes away the temptation to spend it on something new and shiny. You can’t spend money that you never see.
If you’re still worried about joining the investment world, there are a few ways to dip your toes into the water. An online option that makes this super easy is Betterment. Betterment makes is extremely simple to open a new IRA, roll over an IRA, or just learn more about investing. They automatically rebalance your portfolio for you and for a small monthly charge ($3) you can begin investing a small amount.
The site offers secure investing accounts that can automatically reinvest your money based on your preferred levels of risk. For anyone that is new to investing, this is the way to go, and the Betterment returns will be worth your while. Even if you’re a seasoned veteran to the investing field, Betterment could give you the spark your portfolio has needed.
Why a Roth IRA?
For those of you that might not know, a Roth IRA is one of the best tools you can use in your investment portfolio. If your retirement savings plan is falling behind, this might be the perfect way to catch it back up. A Roth IRA offers several benefits that other investment options don’t.
The most obvious benefit to a Roth IRA is lack of taxes on the investments. With a Roth IRA you will not pay taxes on any of the money that builds up inside of the account or when you withdraw the money. Even when compared to normal IRA accounts or even 401K accounts, Roth IRA has the best tax advantages that can add up to thousands of extra dollars.
The other major advantage to Roth IRAs is the ability to invest in just about anything you want. You can invest in real estate, stocks, mutual funds, and bands. Roth IRAs give you the freedom to take as much or as little risk in your investments.
Am I eligible to open a Traditional IRA or Roth IRA?
Before you start counting all the money you’re going to make off those investments, you should make sure you’re eligible to open up a traditional IRA or Roth IRA account (don’t worry, more than likely you are).
For a traditional IRA account, you must be under the age of 70.5, have a taxable earned income, or for a spousal IRA, you must be married or filing joint income tax with someone that meets the previous requirements. There are no income restrictions on a traditional IRA, unlike a Roth IRA.
For a Roth IRA, the requirements are a little different. Unlike with a traditional IRA, Roth IRA’s don’t have any age limit (good news for you old-timers), but there are income restrictions on how much you can make annually and still contribute to a Roth IRA account. For a single file tax income earner, you cannot earn more than $132,000 annually, for married filers it’s $194,000.
Getting Started Investing With a Roth IRA
As you can see, often times there are no minimums in getting started with investing, especially in an IRA. Opening a Roth IRA (or traditional IRA) is much easier than most people think. Just about every bank and investment company offers Roth IRA accounts that you can open in a matter of hours. You can set up your brand new Roth or traditional IRA account in a few simple steps.
The first step is to decide where you want to open up your investing account. Each bank, investing firm, or website has its own set of advantages and disadvantages that you must consider. You have to decide which one works best for you based on what you value you most.
Once you have decided where to open the account, you can get all the required information. The bank or firm will only need a few pieces of information to get you started. You will need a photo I.D., your Social Security number, your employer’s name, address, and contact information, and your checking account number as well as your bank’s routing number. That’s it. That should be all you need to open up a brand new IRA account.
After you have all of your information gathered, you’re ready to jump into the world of investing. After that you have make your first deposit or set up automatic contributions. Some people will put the maximum allowed amount of $5,500 in the initial deposit while other people set up $50 to be deposited every month.
Once the money is inside of the IRA account, it still isn’t invested. You still have to decide how you want to use that money to make you money. You can choose to invest in anything from stocks, mutual funds, real estate, money market accounts, and more. What you invest in depends on your financial goals and your preferred level of risk.
Deciding where to open up your IRA
With so many banks and financial advisors offering Roth IRA accounts, it can seem impossible to know where to start or know which one to choose. They all offer some incentive and they all boast impressive reviews saying they are one of the best places you can open an IRA. But which one should you go with? And what are you looking for?
When you are looking for the perfect account for you, there are a few questions you can ask to help you decide. The first question is how much is it going to cost? Some companies have fees to open or maintain the account while others don’t. Some companies require account minimums and other don’t.
The next question is how much is it going to cost to make trades inside of your account. Each company will have a different fee or percentage for each transition you make.
You should also ask about the types of investments they offer for your account. How large is their selection and how many no-transaction-fee mutual funds do they have?
The last question you should ask is about customer service. Will there be someone available to answer any question you have? Can you talk to someone over the phone, through email, or see them face-to-face? Depending on your circumstances, customer service could be very important to you.
IRAs: what you need to know
Because of all the horror stories revolving around investing, it can be a scary idea to start putting your money in any place other than a jar in the backyard, but that jar isn’t going to help you retire comfortably. But it doesn’t have to be scary. With a little planning and research, you could be well on your way to living the retirement you’ve always dreamed of. Don’t let any excuses stop you any longer from beginning your investment journey.
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