By Ann Coleman (TMF AnnC)
February 24, 2000

Last week we talked about the advisability of starting a Roth IRA, Congress's gift to the working stiff. The tax-free Roth retirement account is one of the best deals around for U.S. taxpayers, and ignoring this gift is like walking away from free money. Of course, it does require a certain amount of gratification delay. You have to do without this year in order to have lots more next (next, next, next) year.

As a society we aren't big on delayed gratification. That's probably one reason why not everyone has a Roth yet. Another is probably the hassle factor. Setting up a brokerage account, especially your first brokerage account, is not exactly a walk in the park. There's paperwork involved and decisions to be made, and the IRA forms, especially, can be intimidating. For one thing, you have to name your heirs. I always find that slightly disturbing. Being reminded that one isn't going to live forever is not something people naturally seek out.

So today, let's look at the process in a bit more detail. First, you need to decide on a broker. That's probably the most time-consuming part of the process, but our Discount Brokerage Center (DBC) can help. Reading through the first three articles listed on that page will go a long ways toward preparing you to make an intelligent choice.

Speaking of intelligent, I had a certain, shall we say lapse in intelligence in last week's article when I advised readers who didn't have a broker yet to "just do it." I said that it was more important to get started investing than to dither about which broker to use because you can always switch later. I forgot that many brokers charge nasty fees to close an IRA account. Not all, but most (including my own I was chagrined to find!) Others charge annual management fees for IRA accounts, but there are a fair number that waive the set-up and annual fees. It would be far more "intelligent" to spend a bit of time checking out those fees than simply picking one and switching later if you don't like it.

There were two other lapses (I was really on a roll, that day) in that article. I should have mentioned that Roth's are not necessarily free of state income taxes, and I indicated that you need to wait five years before withdrawing your contributions. Actually, regular contributions (not earnings, just the cash you deposited) can be withdrawn at any time. Roth conversions from traditional IRAs can't be touched for five years, but that's a different fish.

Thanks to all of you who wrote to "educate" me.

But let's talk some more about setting up a Roth, because this really is important. An excellent way to check out the fees charged by the various brokers is to follow the Other Discount Brokers Resources link in the DBC. Several websites offer help in the decision-making process. The one I found most useful was Don Johnson's Online Investment Resources. It's not slick, in fact it's something of a mess (sorry, Don), but it has great information combined with user feedback, and if you poke around the site, you can usually find a page that lists exactly what you want to know. For example, Don lists the following brokers as offering free IRAs (no set up or annual fee):

Suretrade, Firstrade, Brown, Wyse, MyDiscountBroker, Waterhouse, Ameritrade, InvesTrade, UMC, Web Street, Dreyfus, BCL Online, Tradestar, Discover, DLJ Direct, CompuTEL, Trade-Well, Newport, Mr. Stock, Fidelity, and MB Trading.

In addition, Suretrade, Brown, Waterhouse and BCL Online have no closing fees. Yeah! DLJ Direct has a closing fee but is otherwise free as long as you make at least 3 trades per year, and several others are listed as providing free IRAs with $10,000 account minimums.

(Ameritrade is the one we use for the Foolish Four portfolio. I mention that because I know some people will ask, but it's not an endorsement. They are OK, but I am checking out alternatives, too.)

Cybervest and Don Johnson's site both list brokers by commission making it easy to compare the price you will be paying most frequently. Once you narrow the field a bit, Xolia.com offers side-by-side broker comparisons (but only three at a time) that have almost all the information you would never need to make a selection. I would suggest that you confirm directly with the broker any factors that are important to you before you actually fill out forms, though. Calling the firm to ask a few questions beforehand also gives you a feel for what their customer service will be like once you are a customer.

OK, that does sound like a hassle, but it's also kind of fun and informative. An alternative, if you are not really the consumer-research type, would be to just click on all those conveniently located broker's ads all over our site. Most broker's websites have their commissions and fees prominently listed one or two clicks away from their home page.

Once you have selected a broker, the rest isn't that much more complicated than opening a bank account. Many brokers will let you fill out forms on line, although you will usually have to print them out and send in a signed copy. Get the social security numbers from your heirs and go to it.

Fool on and prosper!

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