How to Open an IRA and Avoid the Pitfalls

If you want to know how to open an IRA, it’s easy.  But if you do so without taking certain preliminary steps, you might waste time and money and make a mess. Yuk.

Here’s a checklist you can use to make sure you avoid the landmines:

1. Determine how you’re going to invest.

Are you a buy-and-hold investor or do you use different investment strategies? Are you going to use mutual funds, ETFs or individual securities? Are you going to buy real estate in your IRA? How are you going to allocate your retirement investments?

You have to be very clear on what kind of investments you’re going to make because:

a. Some IRA custodians don’t offer every investment choice.

b. Some charge more for transactions than others.

That’s why the first step is to get clear on what you want to invest in and how often you’re going to trade.

If you don’t know which are the best retirement investments for you, consider seeking professional guidance. I’m partial to impartial advisors. If you get advice from an insurance agent, you’ll end up owning annuities in your IRA (see below on why that’s a huge error). If you go to a broker for advice, they’ll sell you something they earn commissions on. An independent advisor is just that…independent. (Again, I’m biased because I’m an independent advisor, so take it with a grain of salt.)

2. Stay away from insurance companies.

These guys are tricky. They will be only too happy to open an IRA for you, but their “IRA” isn’t the IRA you’re thinking of. They offer an Individual Retirement Annuity. Annuities are not wise IRA investments because the IRA is already a tax-advantaged account. You don’t need another tax-advantaged account within a tax-advantaged account. It’s a big waste.

Sure the good folks (and there are some) who offer annuities for retirement accounts will tell you that the annuities have guarantees that traditional mutual funds don’t. They will also tell you that the annuities made a lot more money over the last 10 years than the stock market did. All that’s true, but it doesn’t matter.

Your retirement accounts are probably going to be important to you for a lot longer than 10 years. I can’t guarantee the future, but in my experience annuities within retirement accounts works out only for the insurance company – not for the investor.

3. Identify a list of potential custodians.

This is easy. Once you’re clear on how much you’re going to invest and how you want to invest it, get on the phone or internet. I’d suggest checking into TD Ameritrade, Schwab and Fidelity as well as with your bank. Compare the cost of doing the kind of investing you want to do and select the lowest-cost alternative. There will be trading and administrative costs. Ask questions about both.

Remember, if you want professional guidance, this is going to add to your costs. But you have to consider what the cost would be if you make investments without knowing what you’re doing. It’s sort of like saving nickels and forgetting about the twenty dollar bills floating around.

4. Think about your beneficiaries.

The beautiful thing about IRAs is that you get to name a beneficiary. This means you don’t need a trust or will when it comes to IRAs. Your beneficiary form takes precedence. I’ve written an entire post on how to select the right IRA beneficiary, so please review it. It’s super important to select the correct person.

5. Do not repeat this process next year.

I want you to make your IRA deposits each year. I just don’t want you to open a new account every year.

You can make numerous IRA deposits into one brokerage account. You don’t need to open a new IRA account each year. You’re far better off if you consolidate your IRAs as much as possible. So once you open your IRA, you can just dump your yearly deposits into that account and invest it as you like.

I know this can be confusing, but think of your IRA account as a big pot. Each year you’re going to add some ingredients (more money) into the “pot.” The stew changes each year because as you add money, you invest it as you see fit.

Opening an IRA is really easy. Don’t be intimidated. No matter what your experience or understanding is, you can do it. If you’re feeling a bit unsure, just tell the person you’re talking with about your anxiety. They’ll likely be extra kind and gentle. And if not, I guess that narrows the choices. It’s your money. Don’t ever do business with anyone who doesn’t answer your questions or treat you with utmost respect.