It's really quite simple. You call up a discount broker and ask to set up an IRA account. The broker sends you the forms. You fill them out and mail them back in, along with a check or account transfer instructions. Once the check has cleared or your transfer has gone through, you buy your stocks, either over the telephone or over the Internet. Many online brokerages will even provide you the forms via their website. You can fill in all the information online, print it out, and send it in.
Voila. It's done.
In other words, setting up an IRA to trade stocks is no more complicated than opening a bank account or a mutual fund account. When you open the brokerage account, you simply fill out an additional form that designates the account as an IRA. Of course, you're subject to contribution limitations for an IRA, but within those limitations your money will be immune to annual taxes (though in a traditional IRA you will pay income taxes when you withdraw from your account).
Selecting a broker is probably the most difficult thing, but one factor makes it simple: Choose one that doesn't charge a fee for IRAs. By law an IRA trustee (which is what your broker will be) can charge an annual fee to maintain your IRA. This is because they are required to file certain forms with the IRS for each IRA. Many brokers charge around $30 a year to maintain an IRA, but some do not charge anything -- and that is an important consideration.
Another important consideration is the price you will pay to make trades. Discount brokers have brought the cost of a stock trade down to levels that were inconceivable a dozen years ago. And due to the nature of your IRA account, you will want to keep your expenses as low as possible.
The reason for such a parsimonious attitude toward your IRA account is that your contributions are limited. With a regular, taxable account you could pay an extra $10 per trade, for example, and make it up by simply depositing an additional $10 in the account. But with IRA accounts, your contributions are limited to $2000 a year per person. An extra $50 a year in expense that cannot be made up, will, over time, reduce your account balance by tens of thousands of dollars. Who can afford that?
When you decide on the stocks you're going to buy, you'll need to allow for any commissions. Let's say you're investing $2000 and that you work with a discount broker that charges $12 a trade. You decide on a growth stock that's currently priced at $20 per share. Sure, you'd love to be able to buy 100 shares and hit that $2000 mark right on the nose. But you can't. You have to buy 99 shares, which comes to $1980. That leaves you $20 ($2000 minus $1980) out of which you'll pay your $12 commission. Then you'll have $8 sitting in cash, earning interest, which will be there for you to include in your next trade.
With a strategy like the Foolish Four, you don't need investment advice or instantaneous execution times or detailed capital gains reports. All you need is a bare-bones, low-cost, fiscally sound broker. Trading online will most likely give you the lowest transaction costs, and there are a number of respectable brokers that offer that service. Our Discount Brokerage Center offers lots of good advice about finding a broker.
By the way, if you already have an IRA set up with a more expensive broker or mutual fund company, or if you are rolling over a 401(k), your new broker will be happy (really, really happy) to assist you in transferring your funds to the new account. They'll go out of their way to make transfers as easy for you as possible.
