When it comes to saving for retirement, a Roth IRA is one of the best vehicles you can use. This is especially true if you think you might have a higher income in retirement than you do while working. This could be the case if you have significant non-cash assets, like stocks or real estate. With a Roth IRA, you pay tax on the money going in (at your current tax rate). Then you can withdraw it (plus any gains) tax-free in the future, after you retire.
While a Roth IRA is not the only tax-advantaged type of retirement saving account, it’s certainly one you should consider. (In fact, it probably makes sense to diversify your retirement tax liabilities.) When it comes to setting up a Roth IRA, most banks or investment firms offer one.
Why Open a Roth IRA?
A Roth IRA must be funded by earned income. That means you can’t fund it with investments or appreciating assets. There are annual contribution limits, depending on your age.
To get you started, here are some of the best offers we’ve come across. They are currently $6,000 for those under 50, and $7,000 if you’re older than that. Those limits will likely continue to rise over the years, as retirement gets closer. The biggest benefit to a Roth IRA is that you won’t have to pay taxes on the money when you need to use it later in life. This is in contrast to a 401(k) — another common retirement savings account — which is funded with pre-tax dollars, but requires you to pay income taxes on it when you withdrawal it after retirement.
Financial experts actually recommend you use both types of accounts to lower your tax liability once you’ve left the work force for good. To get started with a Roth IRA, here are some of the best offers we’ve found.
For most average would-be Roth IRA account holders, Charles Schwab is basically a one-stop shop. It offers easy-to-understand explanations for beginner investors and even more advanced investing tools for experienced traders. It also scores high with users by offering no commission trading on stocks and ETFs, along with superb customer service.
Even options trading only costs $0.65 per contract. However, the real allure of Charles Schwab is their 4,000+ different mutual funds to choose from. These funds have no minimum balance and no transaction fees, making them a great place for beginner investors to park their money and watch it grow — without paying a huge percentage in fees.
If you’ve never had a retirement investment account before and don’t know where to start, then consider singing up with Betterment. It’s a robo-advisor, which is a software platform and algorithm that basically does your investing for you. You simply fill in some basic information (current age, hopeful retirement age, risk tolerance, contribution amounts, etc) and it designs a good investing system for you.
Best of all, Betterment doesn’t cost you a ton in fees. Most Betterment plans only charge you a 0.25% of your assets every year. No, that’s not 25%. It’s a mere one-quarter of one-percent. For that, you get automatic portfolio rebalancing and automated tax loss harvesting (if you use a taxable account).
For higher level investors, the Premium level of Betterment services offers more. However, you’ll pay a higher fee (0.4%) and you need at least $100,000 in your account to qualify.
Merrill Edge is a long-standing American financial institution, now owned by the equally storied Bank of America. If you already have an account with BofA, your transition to Merrill Edge will be even easier. And if you’re old school and prefer to actually walk into a branch and talk to a person (instead of using an app or website), then Merrill Edge will suit you well.
Merrill Edge has a large team of investment analysts, which will give you strong advice. The same team can also rapidly advance your own investing education, if you’re a beginner. With over 2,500 locations across the country, Bank of America and Merrill Edge provides in-person guidance with ease.
If the thought of picking, buying, and selling various stocks every single week overwhelms you, then check out Vanguard. It’s not really built for day traders or stock speculators. Instead, it specializes in low-cost mutual funds and ETFs that are prefect for long-term investors. Of course, you can still buy and sell individual stocks too, if you really want.
Parking your Roth IRA contributions in a Vanguard fund is a popular retirement planning choice. There are over 3,400 different funds to choose from. Best of all, Vanguard scores big when it comes to fees and commissions. Their stock trades don’t charge a commission and their mutual funds don’t include a transaction fee.
Back to some mostly-digital Roth IRA solutions, this time with Wealthfront. They are generally considered one of the top independent rob0-advisors, since they aren’t affiliated with a traditional American banking institution. They cater your investments based on your expected retirement date and your risk tolerance. After that, you just start making regular contributions and let Wealthfront take care of the rest.
Wealthfront features roughly a dozen different “asset classes.” These various classes give you plenty of options to diversify your assets, which ultimately helps reduce your risk. There’s also some more fully-featured investment tools, like a financial planner for when you’re a bit more experienced.
Wealthfront does charge a 0.25% fee, but it’s basically the same as most other Roth IRA fees. This fee also includes the ability to open a cash management bank account, where you can stash your money before sending it to your investments or even make debit purchases with it.
Fidelity is another long-standing name in the financial investment industry. They have a simple user interface, high-rated customer service, zero-commission trades, and generally low investment fees. For anyone opening their very first Roth IRA and just starting to invest, Fidelity is a great place to get started.
Funding your Roth IRA via Fidelity is super easy. So it obtaining a wealth of information before you pick a mutual fund or ETF for your portfolio. Fidelity recently cut a bunch of their fees in order to remain competitive with other investment services. They were the first broker to bring the expense ratio fee on mutual funds to zero (for select funds only). While you can still expect to pay some small (and fairly standard) fees with Fidelity, they are an excellent broker for your Roth IRA.
Unlike brokers like Fidelity or Charles Schwab, Fundrise is the new kid on the block. Their most popular feature is allowing users to invest their Roth IRA into real estate holdings via a real estate investment trust (REIT). Real estate is a highly sought-after market, since not only does its value historically continue to rise, but it often pays out dividends. Those dividends, if contained in a Roth IRA, are earned tax-free.
Fundrise isn’t as full-featured as some other brokerages on this list. However, their real estate investing options alone make it a promising option. They’ve been returning an average of 10.1 percent since 2014, although those numbers may take a bit of a hit with rising interest rates and a cooling housing market.
A few more important things to know about Fundrise — it requires a minimum account balance of $500 to get started and sometimes requires you to lock in your money for a certain number of years. If you decide you need access to your investment money before the term is up, you’ll have to pay a penalty.
Interactive Brokers is best known for being a popular choice among experienced stock traders. It offers fast and reliable trades for low commissions. However, it also has a under-appreciated market of mutual funds and ETFs that work nicely in your Roth IRA.
Interactive Brokers offers more than 17,000 different mutual funds without a transaction fee. There are also roughly 200 commission-free ETFs to invest in. Beginner investor can opt for Interactive’s “lite” service option, which removes most of the fees in exchange for removing some of the more advanced trading and investing options.
Interactive also excels in global trading. That means you’ll have access to some international markets, which can offer interesting new investing prospects.
Schwab Intelligent Portfolios
We already touched on the services of Charles Schwab earlier. However, if you don’t really know how to get started with a Roth IRA, then Schwab’s Intelligent Portfolios might be best for you. This service is Schwab’s robo-advisor service. Like other robo-advisors, it will create a portfolio on your behalf, based on your financial needs, income level, hopeful retirement date, and risk tolerance.
The best part about Schwab’s auto-investing service is probably the cost — which is nothing. Schwab won’t charge you any commission or transaction fees at all. They take your money and invest it into their in-house funds, which are notoriously some of the cheapest on the market. If you’re maxing out your Roth IRA contributions every year, your investments should grow nicely over time.
This free service has a few downsides — there is no option for human advice and you need at least $5,000 minimum deposit to get started. The premium tier does offer advice from certified financial planners, but costs $30 a month and required at least $25,000 in your account.