First step in the process of opening an investment account is to decide what kind of account is best for your financial future. The options are:
- Retirement Account
- Traditional IRA – Investments are made with pre-tax dollars. You will have to pay taxes at the time of withdrawal. There is an additional 10% penalty for withdrawing money before the age of 59.5
- Roth IRA – Investments are made with post tax dollars. No tax is to be paid at the time of withdrawal, however, if the withdrawal is done before the age of 59.5 then 10% penalty is levied
- Regular Investment Account – Investments are made with post tax dollars and there is no restriction on withdrawals
I have all three kind of accounts and they were opened at different stages of my career. One year I opened the Roth IRA account and invested the tax return that I received. Traditional IRA account was opened when I switched jobs. I wanted more control over my money so I transferred my 401k from the old job to the Traditional IRA account. Regular Investment account was opened so that I can make regular investments and still have the flexibility to withdraw if a need arises.
Once you have made the decision regarding the type of account you want to open, the next step is to choose a broker. The most important feature that you want for your account is the option for automatic dividend reinvestment at no charge. This will unleash the magic of compounding. My broker recommendations are:
If you want to invest in an S&P 500 fund (highly recommended) then the best choice is Vanguard. They don’t even charge a transaction fee if you choose one of their funds. Charles Schwab is best if you want to invest in individual stocks. They charge $4.95 per transaction which is very reasonable in my opinion. Both brokers offer dividend reinvestment for free (a must have).
Even if you are not ready to invest your money into a stock or a fund, I recommend opening an account – its free. You can set up a monthly or bi-weekly auto transfer to this account. Take your time to do your research about how you want to invest your money and when you are ready your account will be ready and funded.
Below are couple of screen shots from Vanguard & Charles Schwab showing what they require to open an account. Happy Investing!
Disclaimer: These are my personal views and are for educational purposes only. I am not a financial advisor.
