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Roth IRA for the beginner
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April 24, 1998: 5:54 p.m. ET
Bombarded by ads and articles, the financial neophyte is asking: how?
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NEW YORK (CNNfn) - The Roth IRA is getting a lot of ink these days, prompting financial neophytes to ask a simple question: How exactly do you open one?
Do you go to a bank, a brokerage or a mutual-fund company? Branch office, online or over the phone?
"People need to understand you don't 'buy' a Roth IRA," said Altair Gobo, a certified financial planner with U.S. Financial Services Corp. in Fairfield, NJ "An IRA is a custodial account. It's a receptacle."
Named for legislation authored by U.S. Sen. William Roth, R-Del., the Roth IRA took effect in January. The Internal Revenue Service doesn't tax your Roth IRA when you withdraw money (as it does with a traditional IRA). Instead, you pay taxes up front, then squirrel away savings that grow tax-free for when you retire.
"The purpose of the legislation was to encourage more Americans to save for retirement…and it's working," said Judith McMichael, a vice president at Fidelity Investments.
IRA inquiries at the Boston-based fund company rose 165 percent between Jan. 1 and April 15 over the same period last year, largely because of the overwhelming interest in the Roth retirement account, McMichael said.
About 62 percent of all retirement accounts opened at Fidelity during that time -- considered "IRA season" -- were Roth IRAs, McMichael said. That's unusually high, considering most people are still making contributions for the previous year, before the Roth took effect, she said.
Where do you start?
You need to consider what investments you want to put in a Roth account when you decide whether to go to a bank, a fund company or a brokerage.
A bank, for example, may have a wider range of certificates of deposit, but might not offer stocks. A fund company may only offer its family of mutual funds. A traditional brokerage may offer any stocks, bonds or funds -- but it may be intimidating for a person who isn't savvy about investing.
The minimum balances required to open accounts also vary widely.
Deciding on an investment strategy should hinge on how much risk you can tolerate -- not on what returns you'd like to earn, said Elissa Buie, president of Financial Planning Group in Falls Church, Va.
Safer investments, such as bank CDs, have annual return rates of 4 or 5 percent, Buie said. But stock mutual funds have average returns of about 10 percent during good years.
A CD is insured by the Federal Deposit Insurance Corp., but at 5 percent return, you'll barely be keeping up with inflation, she said. The most aggressive investments are stocks -- but your savings will lose money if the market drops.
(As with a traditional IRA, you can change your holdings within a Roth retirement account whenever you want).
Making choices
Of course, all of these choices leave you with many options -- and unless you hire your own broker, you'll have to make those decisions yourself. But many financial-services companies have advisers who can steer you in the right direction.
Citibank, for example, has IRA specialists in branches, said Rita Hackel Chapin, a vice president of marketing in New York. If you want to put mutual funds or stocks in the account, the bank will refer you to "investment consultants."
Citibank's offering appeals to some people because there's no minimum to open a Roth IRA and they can have automatic payroll deductions.
"The saying is, you won't miss the money if you never saw it," Hackel Chapin said.
At Fidelity, which has a $500 minimum on Roth IRAs, investors can download an application and fund prospectuses from the company's website. After you have an account, you can buy and sell funds and shares online as well.
For people who don't surf the Internet, Fidelity also offers 24-hour access through toll-free phone numbers.
"We put the control in the hands of the investor," McMichael said. "We help guide people." 
-- by staff writer Martine Costello
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