Step by Step Guide to Start Your First IRA, Roth IRA, or Brokerage Account

Photo Credit: PTMoney

Photo Credit: PTMoney

It’s tax return and bonus season!  My favorite time of the year!  Instead of just throwing the money in a savings account, why don’t we learn how to take one step towards financial freedom and invest some of our bonus money into an IRA.  You can still contribute for last year as well, as long as you put the money in there before April 15th!

If you ask any successful athlete or entrepreneur, they will tell you that the key to success is a series of baby steps everyday towards your ultimate goal!  If your goal is Financial Freedom or a comfortable retirement, here is one baby step every single person in America should be taking today (if you haven’t already)!

Baby Step #1: Starting an IRA/Roth IRA

Here is a step by step guidelines to create your first IRA in 10 minutes!  Congrats on taking this awesome step towards financial independence.  Before we learn how to open our first IRA, let me dispel a myth that keep many people from investing in their IRA/401k.

Myth: My Money Will be Trapped Inside the IRA Until I’m 60

“But Casey, I don’t like the idea of my money being stuck in a retirement account until I’m 60!  What if I want the money earlier?”

While it is true that an IRA is not the same as a savings account and you should be putting long-term investments in here to create your Money Factory that will power your retirement, there are a few ways we can get the money before we are 60!

Rule 72(t) is a favorite among early retirees.  You can get your money from an IRA penalty free at any time using Rule 72(t).  There is only one caveat: you have to keep withdrawing the money forever.  You have to take what is called Substantially Equal Periodic Payments (SEPP) and keep taking those payments until you reach at least the age of 59.5.  The withdrawals are based on your life expectancy and a ‘reasonable’ interest rate.  If interest rates stay the same and you are looking to retire at 40 and start withdrawing from your IRA, then you can expect to withdraw 2%-3%. The idea behind the SEPPs is that your IRA should last your entire lifetime, which happens to perfectly line up with how we construct of Money Factory–we are creating a Money Factory to create income for our entire lives!  Check out this useful calculator to determine what your withdrawals could be.

Roth IRA Contribution Withdrawals are penalty free after the account has been opened for at least 5 years, meaning that if you open a Roth IRA and contribute $5,000 in 2015 you will be able to withdraw that $5,000 after 2020 penalty free.  You cannot withdraw any gains, earnings, or dividends you get–only the base amount of what you contributed.  I highly recommend leaving your IRA untouched!  Once you withdraw from it, you can never put it back in or catch back up!  The best way to build wealth is to stay invested and re-invest your earnings!  That said, it can be quite comforting to know that you have access to some extra money in a real emergency.

Pick a Company

Fidelity and Vanguard are pretty great companies if you will be investing on a consistent basis.  If you invest with their index funds, you will not have to pay a $5-$10 trading fee each time–the applicable funds will be marked “NTF” or “no transaction fee”.  They both have the lowest cost index funds in the biz.  Personally, I like Fidelity because they provide a little more flexibility for funds and individual stocks, but Vanguard’s fee are a tad bit cheaper if you will only be buying index funds.

I talk quite a bit about Index Funds and why they are fantastic for passive investing in this post.  Low-fee index funds have historically outperformed over 75% of traditional high-fee mutual funds over long periods of time–5-10 years.

Pick Account Type

Traditional IRA: contributions are tax deductible, but the deductions phases out after you make more than $61,000* ($98,000* combined, if married).  If you have no retirement plan available at work, your contributions are always tax deductible.  Once you start withdrawing from your traditional IRA, you have to pay income tax on everything you withdraw.  The main idea is that your taxable income is almost always greater during your working years and less in retirement, so if you can skip taxes now and pay them later in retirement you will come out ahead.  This is especially true if you have a high savings rate or are saving for early retirement.

Roth IRA:  contributions are not tax deductible, but you never have to pay taxes on any withdrawals, meaning all the capital gains and dividends and interest from this account are tax free.  If you are single, you must make less than $116,000* to contribute to a Roth IRA. If you are married, you must make less than $183,000* combined.  You can also withdraw your contributions penalty free if the account has been opened for at least 5 years.

Brokerage Account: this is just a regular investing account, no special tax advantages like an IRA or 401k.  I would start with an IRA and only open a brokerage account if you have already maxed your IRA/401k contributions.

There is a $5,500* contribution limit for both types of IRA’s and $18,000* for your 401k.  You get to contribute extra if you are over 50.  If you are saving for the long-term, it’s almost always better to save in the tax advantaged accounts.  This way you will keep your greasy little money-spending fingers out of the money you invested and you get all the tax benefits along the way!  I hope no one here will panic and sell any part of their Money Machine during a market downturn.  Always remember that you own the same amount of shares of the companies, the only thing that changes during downturns is what people are willing to pay for them.  So when the world was burning down in 2008, that just meant people were not willing to pay a lot for your shares of profitable companies.  Savvy investors will scoop up bargains during these market crashes.

Related: Simple Stress-Free investing
Related: Why You Should Be Excited About Market Panics and Bear Markets

Open an Account

Hop on over to whichever company you decide you like better.  I will use Fidelity for the picture walk through.  At the top there should be an “OPEN AN ACCOUNT” button, so click away!  Check the requirements for Traditional IRA vs. Roth IRA.  Just make sure you meet the requirements before putting any money in.

Open - Fidelity

Fill Out the Required Info

Make sure all the informational matches your legal information.

Open1 - Fidelity

Select “Core Position”

Select how you want to keep your cash.  One option is bank insured cash, the other is a Money Market Account.  Rates are so low that the Money Market Fund will only earn you 0.01% or something ridiculous, so I’d rather just have insured cash.

Open3 - Fidelity

Make Sure All Your Info Matches Your Legal Name


Open2 - FidelityLink a Bank Account

Next you will need to link your bank account.  Simple stuff.  You will need a routing and account number.  You can also set up automatic transfers and automatic investment later, which I love. With automatic transfers + investing, your IRA becomes a mini 401k.  Automatic, simple, tax advantaged savings machine!

Open5 - Fidelity Open6 - Fidelity

Start Investing!

Here is where a lot of people get scared and fail to pull the trigger.  401k’s are easy because of the limited choices and often they are automatically picked for you when you first start you 401k.

Just remember to keep it simple!  Even Warren Buffett loves simple low cost index funds.  In fact, he has gone on record to say that when he dies and his family inherits the money, he will leave 90% of it in a SP500 index fund and 10% in short-term government bonds index.

Here are the most popular index funds for Fidelity and Vanguard:

FUSEX – SP500 index fund: the 500 largest companies in the US (0.10% expense ratio, 0.05% after you have invested $10,000)
FSTVX – Total market index of 3500 companies, 75% large companies and 25% mid/small companies (0.10% expense ratio, 0.05% after you have invested $10,000)
VFINX – SP500 index fund: the 500 largest companies in the US (0.17% expense ratio, 0.05% after you have invested $10,000)
VTSMX – Total market index of 3500 companies, 75% large companies and 25% mid/small companies (0.05% expense ratio)

I know that once you finally have $10,000 invested in a Fidelity Fund, they will automatically switch you into the Advantage Class so you will have the lower 0.05% expense ratio.  Vanguard will periodically review accounts and upgrade you to the lower expense ratio as well, although you can upgrade it easily yourself as well if you don’t want to wait.

Open7 - Fidelity

Now just use that little trade box highlighted to buy some index funds/stocks!  If this is your first time buying stock outside of a 401k, congrats!  You are On Your Way To Wealth!  Keep it up!  Try setting up automatic investments and turn your IRA into a mini 401k.

If you would like any other step by step guides shoot us an email to or leave a comment!

*number is based on limitation in 2015

Further Reading:
Simple Stress-Free investing
Why You Should Be Excited About Market Panics and Bear Markets
How To Make The Most Of Your Tax Return

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