Opening a Roth IRA on a Budget

(UPDATE: There’s a newer version of this article here – Opening a Roth IRA with No Minimum)

A reader recently asked me about starting a Roth IRA with a minimal opening amount (less than $500), and I think it’s a good question. Most of the major companies expect you to have a substantial initial investment (usually 2-3k), so what can someone who doesn’t have that much do?

It doesn’t seem fair to indirectly punish someone who currently makes little money from taking advantage of tax-free growth. For example, suppose a full-time college student with a part-time job hears about the benefits of a Roth IRA, but can’t scrape together the initial investment amount to open an account at a place like Vanguard or Fidelity. What then are his/her options?

Option 1 – Keep Saving

Of course, you can just keep saving a little bit every month until you DO reach the required minimum at your company of choice. Scheduling an automatic weekly or month transfer into an online savings account can help. You can even try taking advantage of a few bank or credit card sign-up bonuses to help expedite the process. Once you reach $1,000, your choices begin to broaden.

Option 2 – Local Banks

Another option is to visit a few local banks and ask about opening a no-minimum IRA. Many banks offer IRAs that utilize a money market or a CD. One disadvantage is that you may only have a short “window” each year in which you can invest additional cash. Plus, if you are young, a CD or money market is a very conservative investment. A mutual fund is better more suitable if you have decades to invest before you retire.

What then, are some choices involving mutual funds?

Option 3 – Fidelity

  • Minimum required to open an IRA: $2,500
  • Minimum requirement waived if you agree to a $200 per month automatic transfer.

fidelity_simplestart.png

As you can see, Fidelity requires a pretty steep commitment to open an IRA, but offers a SimpleStart option that waives the minimum amount. This feature is nice, but our example college student may not be able to scrape together $200 every month. However, if you can afford this monthly transfer, Fidelity is a great choice. Otherwise, let’s look at some alternatives, shall we?

Option 4 – T. Rowe Price

  • Minimum required to open an IRA: $1,000
  • Minimum requirement waived if you agree to a $50 per month automatic transfer.

trowe_minimums.png

T. Rowe Price’s IRA offerings are a little more suitable to those with a small initial investment, although the $1,000 minimum is still higher than desired. However, if you can afford the $50 per month automatic transfer, T. Rowe Price is another great option. I suggest looking into their SmartChoice IRA Funds, which are targeted toward a specific retirement year.

Keep in mind that T. Rowe Price charges an annual custodial fee of $10 for all IRAs that have balances lower than $5,000.

Option 5 – ING Direct

  • Minimum required to open an IRA: $250
  • Minimum requirement reduced to $25 if you agree to a $25 per month automatic transfer

Now we’re talking! Due to their recent acquisition of ShareBuilder, ING Direct has recently started offering mutual funds and retirement accounts, and the $250 minimum is ideal for someone starting a Roth IRA on a budget. If that amount is still too high, you can open an account for as little as $25 if you agree to a $25 per month automatic transfer. Even a college student with a part-time job should be able to afford that!

All is not well in the land of ING, though. For starters, they charge a $10 annual custodial fee on IRAs, no matter how much you have invested. Please see their Fund Fees and Minimums page. Not only that, the expense ratios on their 15 funds are higher than average. As of this writing, the expense ratios range from 0.61% (Money Market Fund) to a whopping 1.75% (Global Science and Technology Fund)! Not sure what an expense ratio is? See here.

Don’t let me dissuade you. This would be a fine “starter” account, but I would consider transferring to a different company with lower expense ratios once you have accumulated $2,500 or more.

Option 6 – E-Trade

  • No account fees or minimums (when you sign up for online statements and confirms)

e-trade_minimums.png

And here we have what is perhaps the best deal yet. E-Trade offers the option to start an account with no minimum, provided you agree to receive all communication online rather than through “snail” mail.

E-Trade has a massive amount of funds (over 7,000), and there have been worries about bankruptcy, so this choice may be intimidating for a beginning investor. Still, considering that there is NO minimum, it is a viable choice provided that you are willing to do your homework in deciding which funds are right for you.

If in doubt, I suggest going for one of the no-transaction fee, low-expense ratio funds, such as their S&P 500 Index Fund.

Other Thoughts

Of course, this list is not comprehensive, as there are many other options and companies available. No matter which option you choose, contribute as much as you can, and your nest egg will continue to grow tax free.

My own IRA is currently held at Vanguard, but the initial investment minimum for most funds there is $3,000. The only exception is the STAR Fund, which requires only $1,000. Once you reach the 3k threshold, you may consider transferring to Vanguard, as it is a solid company with consistently low expense ratios.

Of course, my disclaimer is that I have attempted to provide entirely accurate information, but please make sure to do your own research before investing. I hope that the information I provide is valuable, but please leave a comment below if you find an error or would like to suggest another offering. We can all benefit from that knowledge.

Happy investing!

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  • http://www.freefrombroke.com/ Free From Broke

    Thanks for the great info! I’m looking into contributing to a Roth IRA and I’m leaning towards Vanguard.

  • http://www.interestingmoney.com Mr. IM

    You’re welcome. If you can afford the minimum, Vanguard is an excellent choice. I like their Target Retirement funds because they are essentially pre-packaged portfolios. It’s nice for people like myself who have not accumulated mega bucks yet. :-)

  • http://www.linkedin.com/in/burda Steven Burda, MBA

    Thanks!

    Happy New Year (three weeks!)

    http://www.linkedin.com/in/burda

  • Uncle Jim

    Good Info. I am personally headed for the Roth IRA. Just remember that knowledge is power. Make your decisions based on your specific goals and don’t let anything stand in the way of your dreams. As always, a goal is just a dream with a deadline.

    Uncle Jim

  • http://jessica.mortgagefit.com/ Jessica Bennet

    Hi,

    A Roth IRA isn’t a good option if one is looking to get tax deductions on the contributions as in a traditional IRA or 401k Plan. However, the earnings on a Roth and withdrawal from it are tax-free. So, in a way, it has some tax benefits.

    If anyone is really interested to get tax benefits through contributions, well, he may go for a flexible spending account or a traditional IRA etc. There are however some other ways to get tax deductions/credits and these are available at http://articles.moneycentral.msn.com/Taxes/CutYourTaxes/10bigDeductionsTooManyPeopleMiss.aspx
    and http://www.mortgagefit.com/tax/34tips-deduction.html .

    Regards,

    Jessica

  • Fern

    Hi. I’ve got an IRA question for you. I opened a CD IRA with Bank of America a while back. (I didn’t know much about IRA’s back then, except that it was imperative to start early.) The CD is about to mature, and I had planned on transferring it to a Vanguard STAR account, but now that the economy is tanking, should I reconsider? And put it in a CD again, since the return rate is fixed?

  • http://www.interestingmoney.com Mr. IM

    Fern – I suggest going with the Vanguard STAR option. Yes, the economy has been tanking, but if you have 20+ years before you need the money, NOW is actually a pretty good time to get into mutual funds. It’s a much better time than when I opening my Roth IRA at Vanguard (early 2007).

    My Vanguard IRA is down about 40% right now, but since I have 30 years or so until retirement, I’m not too worried.

    Just remember the old adage about “buy low, sell high.” Right now the market is low.

  • Steven Townsend

    I use “Hodges Fund” for my childrens IRA I started last year. I figured Social Security wouldn’t be around by the time they got there. Hodges Fund only requires $250 startup with NO mandatory monthly deposits. I think their expense ratio is 1.5%. You can get the startup application right off of their website. Just do a google search for hodges fund.