When you open an IRA you can choose where you want to have it. This has created a lot of competition between companies that want to be chosen, resulting in lower costs for account holders in many cases. The expense ratio is a way of determining the cost of having an IRA, but it does not factor in all costs, such as transaction costs and brokerage fees, so the expense ratio should only be used as a guideline.
1. Get the expense ratio for any IRA custodians you are considering. They all should be able to tell you what their expense ratio is, but if they don’t provide you with a number you can figure it out yourself. To calculate this number, divide the annual cost of operating an IRA by the average net assets of the IRA, then turn the resulting number into a percentage. This is the expense ratio. An easy way to do this is to use a specific figure, such as $1,000, as your average net asset in order to determine the ratio.
2. Compare the expense ratios from all of the companies you are considering and rank them in order of size. The smaller the percentage, the smaller the expense ratio and the lower the charges to you. Make a note of any other costs that will apply to your IRA with each custodian, such as maintenance and transaction fees.
3. Add up the total cost for an IRA at each of the companies. Choose a company that not only has a low expense ratio but also a minimum of additional costs, so that you don’t spend in other ways what you’ve saved on the expense ratio.
4. Open an account with the company that you have selected as being the best choice for you. In most cases you will need to provide your birth date, SSN, permanent address in the U.S. and employer’s name and address. Depending on the company, you may be able to do this online, or you might need to go into the company offices and fill out paperwork.
5. Fund your IRA with an initial deposit. Some companies require a certain amount in order for you to open an IRA, such as $100, but some companies do not require a minimum deposit in order to establish your IRA. Your account has now been opened.
- If you think you will do a lot of trading, look for an IRA that offers not only a low expense ratio but also has low trading fees. If you don’t plan on trading much once you have purchased securities for your IRA, the trading fees may not impact you as much as the maintenance fees. In some cases there may only be a maintenance fee for accounts below a certain minimum level.
- Be sure that the company you choose to place your IRA with is reliable and has a good reputation. You want your money to be there for you when you retire, and if the company disappears, your money may do so also.
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