How To Open a Fidelity Roth IRA: A Step-by-Step Guide

Published Jan 14, 2020

Roth IRA, traditional IRA, and 401(k) were all foreign terms to me just a few years ago. Actually starting to invest was foreign…er.

When I came to the realization that I needed to start saving for my future in retirement, I found that the best way to start was with a Roth IRA.

There are plenty of resources online to help you understand the inner workings of Roth IRAs. I would recommend you take some time to sit down and read about how IRAs work and why you need them.

Just to make sure you know what you’re getting yourself into, I’ll give a brief overview of what a Roth IRA is.

Brief Overview

A Roth IRA is a retirement plan, where you set aside money that you can use when you are 59 1/2 years old. You can place post-tax money into your Roth IRA, meaning that any money in your Roth IRA is going to come from your own bank account.

Essentially, you are paying taxes on the money going into the account and can withdraw tax-free money when you retire. It is often one of the first steps to saving and potentially retiring early.

The Roth IRA is a great option if your tax rate now will be lower than your tax rate in retirement. If you believe you will be in a higher tax bracket when you are in retirement (this applies to many people), then you should start investing in a Roth IRA.

Your tax rate will differ depending on your income. Suppose I am single and am making $75,000 per year. I would have a tax rate of 22% as of 2020.

Tax RateSingle
10%$0 to $9,875
12%$9,876 to $40,125
22%$40,1256 to $85,525
24%$85,526 to $163,300
32%$163,301 to $207,350
35%$207,351 to $518,400
37%$518,401 or more

If I have any reason to believe my income will increase beyond $85,525 by the time I’m 59 1/2 years old, then I can take advantage of the Roth IRA. Even though I’ll be in a higher tax bracket, the money will not be taxed when I take it out at 59 1/2.

You can find a complete table of the tax rates here.

That being said, there are limits to the Roth IRA. If you are single and make over $139,000 per year, then you cannot contribute to your Roth IRA. However, there are ways to circumvent this issue such as a Backdoor Roth IRA. Furthermore, you can only invest up to $6,000 into your Roth IRA annually as of 2020.

Hold your horses. None of those reasons justify not starting your Roth IRA today. Check out this graph:

If you were to invest $6,000 every year in the S&P 500 (average 7% rate of return) from the age of 25 to 65, you would have $1,280,000 in your Roth IRA and would have saved $456,238 in taxes.

The best part is that you would only have contributed $6,000 * 40 years = $240,000 of your own money into the account, making you $1,280,000 – $240,000 = $1,040,000.

Simply amazing.

How to Invest with Fidelity

I’ll walk you step-by-step through how to invest your first dollar into an index fund that tracks the S&P 500, which simply measures the stock performance of the United States’ 500 largest companies.

This is a great way to start investing. You don’t need to do research on which stock will perform the best since you’ll be investing in all the stocks. If one stock fails, you have the other 499 stocks to keep you afloat. This index fund has averaged a 7% rate of return in its lifetime.

Step #1: Open a Fidelity Account

First, we want to register an account with Fidelity (you’ll need your name, SSN, DoB, etc).

Select Open an Account.

Choose Open Now under Roth IRA.

You’re probably not a customer yet if you’re reading this article 🙂

Enter a working email and a real name.

Enter valid information here.

You can change your Employment Status at any time, so don’t worry about it too much if you’re not sure what to put.

Your Core Position is just where your money goes when it’s not being invested. It honestly does not matter which one you select since your money should always be invested. But yeah, choose SPAXX.

Congrats! You’ve successfully registered an account with Fidelity. Verify that you received a confirmation email upon registration.

You should see a Dashboard when you log in. The Positions tab will tell you where your money is invested in all your investment accounts. Currently, you should have no investments.

Step #2: Transfer Money Into Your Roth IRA

Next, we need to transfer money into the Roth IRA. Money transferred will go into the Core Position, meaning it’ll just sit in your account as if it’s sitting in your checking account. It’s not invested, yet, but you still need to take this step.

Click the Transfer tab.

Add your bank account and follow the instructions.

Select your bank account as Transfer From and Roth IRA as Transfer To. You can select your contribution year as well. You can contribute to the previous year until April of the current year (I can contribute to 2019 until April 2020). It would be good to max out the previous year before getting started on this year so that you have more money to grow.

Once you have confirmed the transfer, it will take approximately one business day until the transfer is complete. So, now you can take a break.

Step #3: Trade Money Inside Your Roth IRA

Once you have the money transferred into your Roth IRA, the Core Position row should show the amount of money transferred. This money is not invested, yet. I repeat. It is not invested. It is basically the same as a checking account.

Select the Trade tab.

Choose Mutual Fund as the Transaction Type. Search FXAIX as the Symbol.

FXAIX is the Fidelity S&P 500 index fund. Also, it should say how much money you can use to buy these funds next to Cash Available to Trade.

Select Buy as the Action and input the amount of money you want to use to buy this index fund.

Amazing! You’ve invested your first dollar.

Step #4: Set up Automatic Monthly Investments

Now that you’ve invested some of your money, it would be a great idea to make this a recurring payment. To max out your Roth IRA in 2020, you would ideally be investing $500 per month in your Roth IRA.

That is a lot of money for many people, so you can just use that as a goal. Maybe you want to start at $50 per month and then slowly work your way up there.

Select the Transfer tab and then See more transfer options.

Select Set Up Automatic Transfers.

Select Set up an automatic transfer or investment within the Roth IRA section.

Select Transfer funds from an external bank account.

Within Transfer To, select Mutual funds you own. If FIDELITY 500 INDEX FUND shows up, choose that option and enter the monthly amount to the right. If it doesn’t show up, wait until the next business day for your previous trade in Step #3 to complete. You can modify all of this at any time.

Conclusion

Congratulations! You’ve gone through the process of setting up your Roth IRA. Simple, right?

There are many different strategies that people use to determine their investments. They use target-date retirement funds, three-fund portfolios, and many other methods.

I’m a big fan of the “100% stock investments until I’m old” strategy, which includes the S&P 500 and small-cap stocks. That is something for you to research and decide on your own. I may write up an article on my asset allocation and motivation behind it. We’ll see!

Best of luck to you and your investing 🙂


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