How to Open and Invest in a Roth IRA
Listen, y’all, I’m no financial advisor. But I implore you to consider opening a Roth IRA if you have not already.
Before we answer the question “How?”, let’s answer the question “Why?”.
Take a look at the simple example below.
If you set up your account to contribute even just $50 per month, over the next 20 years you will contribute $12,000 of your own money. However, due to compound interest (assuming a reasonable return of 8%), your money will have more than doubled, growing to over $29,000. That’s $17k of free money you just made simply by starting today and giving it 20 years to grow.
The more you put in now, the more you will have later. Compound interest is the ticket to a rich life.
Steps:
- Get your bank account info handy for your checking account (routing number and account number). This should be the account that your paycheck is deposited into every month/two weeks.
- Google Charles Schwab, go to their website, and open an account (Use whichever financial institution you want. I’m picking Charles Schwab for this example despite investing with Vanguard because CS does not have a $1k minimum like Vanguard).
- Open a Roth IRA account.
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Provide your bank account information and make your first transfer/set up automatic transfers to buy mutual funds.
- You’re not done yet!!!! We haven’t actually invested in anything, our money is currently sitting in what’s basically a normal bank account. You still must invest it.
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Go to your Roth IRA and click buy shares. What do you buy? That’s up to you and your financial situation, but for almost everyone I’d recommend some sort of Target Date Fund. These funds do all the work for you, changing your asset allocation over time so that your investment strategy is riskier when you’re younger and more conservative as you approach retirement. Buy the Target Date Fund that aligns with your year of retirement (ie around the time you turn 65. I personally buy shares in the 2055 fund, VFFVX).
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You want to set this up so that it automatically buys shares each month.
- Note: we’re essentially doing two things here. Every month, we want our money to automatically flow from our checking account to our Roth IRA. However, that’s not all—we also want that money to get invested from our Roth IRA into the specific Target Date Fund we’ve chosen. Two steps. Both automated so we don’t have to think about it.
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Be patient, keep contributing every month (even in economic downturns. No need to change anything, the shares are just cheaper), and watch your money grow—slowly at first, but as your contributions grow the payoffs get increasingly impressive.
Investing for the long term isn’t sexy, but down the line you will be thanking yourself for setting yourself up for a rich life! Note that there are penalties for withdrawing the gains (i.e., the interest) before retirement age, but you can always withdraw the principal (i.e., your money) earlier, although this is not recommended.
tl;dr Don’t touch it babe, just let it do its thing.
Reach out with any questions.
Wanna learn more about how to make your money work for you and live a rich life?
Read “I Will Teach You to be Rich” by Ramit Sethi. Not a reader? Get the gist and learn about money scripts in relationships by listening to his podcast, Money for Couples. He also has a website with resources, but really all you need is the book!