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Opening and Funding a Roth IRA Account

You can open a Roth account at any time. Whether you can contribute to it for any given tax year depends on your income and filing status: see the rules page.

The choice of who to open your account with depends on your choice of what type of investments you want in it. If you want to invest in individual stocks or ETFs, you'll open your account with the stockbroker of your choice (preferably a low-cost one). If you want to invest in index funds or other mutual funds, you'll open your account with the fund provider. In each case, you'll specify that the account is a Roth IRA account, rather than a regularly-taxed account, at the time you open it.

 

If You're Just Starting Out ...

If you're just starting to save for retirement and are overwhelmed by all the choices, you can start with something very simple now - you can always modify your portfolio years from now when you are more experienced and knowledgeable. The obvious starting investment for your account would be a Total Stock Market ("TSM") index investment (either a regular index fund or an ETF). Two equally easy ways to go:

  1. Choose a low-fee TSM from a respected, well-known index fund provider that has a customer-friendly reputation. (Ideally they will have a wide selection of other low-fee index funds, so that you can modify your portfolio several years from now when you may want to.) You can open an account on their website, specifying that it's a Roth IRA account rather than a regular account.

    - or -

  2. Choose a low-fee TSM ETF, again from a classy provider. This time you open your account with your choice of stockbrokers, again specifying that it will be a Roth IRA account. Once the account is open you'll buy shares of the ETF using its symbol.

(This list of index funds has some possible TSMs to consider.)

 

More Generally ...

Generally speaking, your Roth account is appropriate for the least tax-efficient funds in your long-term retirement portfolio. Let's make that more clear by taking a specific example. Suppose you have decided to build a retirement portfolio out of three types of index investments: total stock market, foreign, and small value. We'll fill in the table with specific fund numbers (taken from three different companies so as not to play favorites):

 

Fund Type Representative Fund
Symbol Turnover Rate Dividend Yield
Total Stock Market FSTMX  6% 1.47%
Foreign EEM  9% 1.12%
Small Value VISVX 30% 1.80%

Turnover rate and dividend yield from Morningstar as of 1/20/2006        

 

Portfolio turnover (that's the percent of the fund's stock portfolio that gets sold and reinvested every year) and dividends are the causes of tax inefficiency; so based on these numbers, the small value fund is the logical choice for the Roth IRA account; the other two would do fine in a regularly taxed account.      
Morningstar Snapshot
 

(At this point you may want to see the tiny list of index funds in the separate index funds article; and see this article on Principles of Tax-Efficient Fund Placement.)

 

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Article Contents
Roth IRA Intro
Rules & Eligibility
Opening an Account
Calculator

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Roth vs. Deductible