I think everyone who is eligible to open a Roth IRA should consider it. The long term tax advantages usually make the Roth IRA a great way to invest for your retirement. It is easy to open a Roth IRA, all you need to do is fill out a form or to and make a contribution. The most difficult part about opening a Roth IRA is deciding where to open your account, and which investment to purchase. I can’t tell you which stock, bond, or mutual fund to purchase, but I can show you a few good places where you can open a Roth IRA.
Where to Open a Roth IRA
Examine your investment needs. Many financial institutions can act as a custodian for your IRA, and we can break them down into three main categories: banks, mutual fund companies, and brokerage firms. Banks usually only offer CDs, money market accounts and similar investments. Some banks may offer other investment options, but they often have higher commissions and expense ratios than mutual fund companies or brokerage firms. Unless your bank offers a full service brokerage and reasonable costs, you can probably do better with a mutual fund company or a discount brokerage.
Mutual fund companies vs. brokerage firms. For most people, mutual fund companies and the large brokerage firms are the best option because they offer a wide variety of investments with low expense ratios and low commissions. For the more experienced investor, or the day trader at heart, a discount brokerage firm may be a better option.
Best discount brokerages for Roth IRAs
If you want to invest in individual stocks, one of your main concerns will be cost per transaction. Discount brokerages such as those listed below offer low cost stock trades to meet most investors’ needs. Each of the following discount brokerages offers unique features that may make them a better option for your situation. Note that all of these brokerages offer IRAs without any associated custodial fees or minimum balances.
Scottrade. Scottrade is one of the most well respected discount brokerage firms and offers a feature that none of the other major discount brokerages offers – local branches. This is a great feature for someone looking for that ‘personal touch.’ Scottrade Roth IRA Account Features:
- Local branches.
- $7 stock trades.
- No custodial fees, no minimum balance for Roth IRAs accounts.
- Read Scottrade Review.
- Open an IRA with Scottrade.
E-Trade. E*Trade has been rated #1 Online Broker for 3 consecutive years by Smart Money Magazine (07-09). In addition to a full service brokerage, E-Trade also offers a full scale bank, including top rated checking and savings accounts. This makes their Roth IRA option very attractive if you prefer to do more of your banking with one financial institution. E-Trade Roth IRA account features:
- Full feature bank.
- $9.95 stock trades.
- No custodial fees with electronic statements, no minimum balance for Roth IRAs accounts.
- Open an IRA with E-Trade.
*Bonus Offer. E-Trade offers 100 free stock trades for new customers who open a new Roth IRA with their brokerage. Here is more details about the 100 free trades with new IRA.
Zecco. Zecco burst onto the discount brokerage scene a few years ago by offering free stock trades to all members. The free trades eventually became more limited, and are now set to 10 free trades per month if you maintain a balance of $25,000 or make 25 trades per month. All is not lost though, as stock and ETF trades are only $4.50 each, which is lower than many other discount brokerages. Zecco Roth IRA account features:
- $4.50 stock trades.
- No custodial fees, no minimum balance for Roth IRA accounts.
- Read Zecco Review.
- Open an IRA with Zecco.
TradeKing. TradeKing has been rated best overall discount broker and best in customer service. They offer $4.95 trades, free trading tools, free access to Maxit Tax Manager, a learning center, and a community where investors can share tips and information. TradeKing also offers a $150 reimbursement when you transfer your assets to TradeKing from another brokerage. TradeKing Roth IRA account features:
- $4.95 stock trades.
- No custodial fees, no minimum balance for Roth IRA accounts.
- Read TradeKing Review.
- Open an IRA with TradeKing.
ShareBuilder. ShareBuilder offers inexpensive trades at $4 or less for automatic stock trades; real time trades cost $9.95. ShareBuilder is owned by ING Direct, which makes it easy to link your savings account to your brokerage account. This is a great feature if you need to quickly transfer money to execute a trade. ShareBuilder Roth IRA account features:
- Link your ShareBuilder account to your ING Direct Account.
- $4 automatic trades (or less).
- Free automatic DRIPs.
- No custodial fees, no minimum balance for Roth IRA accounts.
- Read ShareBuilder review.
- Open an IRA with ShareBuilder.
Each individual investor’s needs are different, but the above options are a great place to start when looking for a place to open your IRA.
Best mutual fund companies for IRAs
Index funds and mutual funds are often the best investment option most investors, especially those who are new to investing. Be sure to examine commissions and fund expense ratios, minimum required investment, variety and quality of investment options, accessibility to funds, annual IRA management fees, low balance fees, and other fees. You want to avoid these fees or pay as little as possible.
Vanguard. Vanguard is a nonprofit mutual fund company that passes savings on to the customer. They have a wide variety of top rated mutual funds and some of the lowest expense ratios in the industry. Their index fund selection is particularly competitive when it comes to low expense ratios. I have been with Vanguard for about 7 years now and have nothing but good things to say about their service and investment options.
- Minimum investment. $3,000 for most funds, $1,000 lowest.
- Commissions. Free for Vanguard funds, early redemption fees may apply. Commissions vary for outside funds.
- Account fees. None with electronic statements.
- Sign up for a Roth IRA with Vanguard.
Fidelity. Fidelity offers a wide variety of low cost mutual fund and index fund options, and trading Fidelity owned funds is free, though early redemption fees may apply if you sell too quickly. There is a minimum investment requirement of $2,500 to open an IRA, but they will waive that fee if you can commit to automatically invest $200 per month. The downside to opening a Roth IRA with Fidelity is that their index funds require a minimum of $10,000 to open, making it more difficult to invest with index funds in your IRA. However, you can open an IRA from their great selection of low cost mutual funds and later transfer your assets into an index fund when you amass $10,000.
- Minimum investment. $2,500; can be waived with monthly investment of $200.
- Commissions. No-load mutual funds, no sales charges, or commissions on Fidelity Funds; commissions vary for outside funds.
- Account fees. None for IRAs.
- Sign up for a Roth IRA with Fidelity.
T. Rowe Price. Most T. Rowe Price funds have expense ratios lower than their Lipper averages, which means more of your money works for you instead of your broker. You can avoid annual fees for mutual fund accounts if you maintain a balance of at least $5,000 or if you are an individual with a balance of at least $50,000 or more invested with T. Rowe Price. T. Rowe Price requires a minimum of $1,000 to open an IRA. However, the minimum investment requirement is waived if you participate in the Automatic Asset Builder Service and contribute at least $50 per month.
- Minimum investment. $1,000; can be waived with monthly investment of $50 per month.
- Commissions. No-load funds with no sales charges or commissions for T. Rowe Price funds; early redemption fees may apply.
- Account fees. $10 for IRA if under $5,000. Can be waived if individual maintains $50k or more with T. Rowe Price.
- Sign up for a Roth IRA with T. Rowe Price.
If you prefer a more hands on approach to investing and want to trade individual stocks or ETFs, then read consider opening a Roth IRA with a discount brokerage firm, where individual stock trades cost much less than with most mutual fund companies.
{ 35 comments… read them below or add one }
I started at Scottrade and then shifted most of my positions to Vanguard for the index funds. But I kept my stocks over at Scottrade because trading individual stocks at Vanguard would’ve cost me way too much.
WC, you just pointed out the main difference between the two types of brokerages. The mutual fund firms usually offer great mutual funds with little to no commission, but often charge substantially more for individual stock trades. The discount brokerages are the opposite. I use both types of accounts for different types of investing.
My first Roth IRA was opened with the help of my insurance agent, who had just completed his securities training. It is a low-fee account, but still a managed account. Now I’m all about the Fidelity account (putting in a monthly sum instead of having the account opening). My younger brothers started before I did, when they were teens (smart boys) and did the T. Rowe Price thing.
T. Rowe Price is a great option for those who only have a small amount to put away each month. But Fidelity offers some great plans too!
I went with Vanguard because of a lot of praise from others. It was very easy to set up and for someone young like me with limited knowledge went with a simple lifestyle fund to take care of everything for me. It’s a mutual fund but like you mention commissions are free since it’s through Vanguard, so you don’t need to feel like you have to search for an index fund for the lower ratio, they are the same with Vanguard.
Craig, I’m a big fan of Vanguard as well. I have been with them for years. But I also don’t hesitate to recommend the other firms mentioned in this article. THey all have a very solid reputation and a wide variety of quality funds.
I use Firstrade.com, and I’ve been very happy. Trades are relatively cheap, and there’s no minimum balance requirement or Roth IRA fee. Also, I can reinvest dividends free-of-charge, which is a real selling point for me personally.
I’ve also heard great things about TradeKing and Sharebuilder.
Where I bank at I am able to start a Roth IRA. I think that I am young enough that I can get a great return especially as the market begins to turn around.
I love Vanguard- just moved my stuff there from USAA.
Also, if you want to start with the lowest option, invest with their STAR Fund. It’s the only one that allows $1,000
I just opened a Roth at Vanguard yesterday, but I’m a big fan of T Rowe Price as well. I prefer T Rowe P’s no initial investment options, that is how I started my taxable investing years ago. Vanguard’s high minimums really put off even a dedicated saver. I had to go with the Star fund since I don’t have $3000 set aside yet for the Roth. My plan is to start the automatic investing right away and build up to that $3k threshold so I can get into one of the index funds.
Miss M, The $3,000 minimum is one of the biggest downfalls that many people experience with Vanguard. But you found the easiest solution (and that is probably why Vanguard sets the minimum to $1,000 for the Star Fund).
I opened a Roth IRA account (American Funds) this month and when I received my confirmation letter I see a sales charge of 5.74%. That seems a little much. Am I being charged too much as I also have a deferred comp account with my employer through the same advisor that set up the IRA for me.
Bill, one of the biggest things to look out for when opening any financial account is the fees – how much, what type, one time or recurring, etc.
5.74% sounds high, but I don’t know the full situation, so I can’t say for certain. I recommend contacting your broker and asking him exactly what the fees cover and any other information regarding fees. Transparency is one sign of a good broker.
If it is just 5.74% to open a mutual fund and is something you could do on your own, then you are likely better off opening an IRA at a mutual fund house such as Vanguard or Fidelity. You won’t pay any up front fees for purchasing funds they run and they feature some of the lowest expense ratios of any mutual funds.
Hey folks, thanks for all the info re: Vanguard’s Star Fund. I’d really like to open a Vanguard, but the $3K minimum is hard given my liquidity. What exactly is the Star Fund, and what are its advantages/disadvantages?
Thanks!
Robert, another blogger wrote a good review of it here: Vanguard Star Fund (VGSTX): The Ultimate Fund For Beginners?.
Ryan, thank you so much!!! This article was incredibly informative!
Can I transfer my traditional and Roth IRA into a brokerage account
Yes you can, and most brokerages will be happy to help you with the paperwork.
Wow, after looking at tons of older links (07′ and 08′ stuff) I finally found a currnet one! Anyways, I’m 23 and looking to open and fully fund Roth IRA’s ($5,000 a year x2) for both my wife and I. I plan on opening the accounts with my income tax check so figure about $3000 in each account. My problem is I don’t know which company to go with. I’m in it for the long haul, I figure about 40 years till retirement, and I’m looking to average about 9% or so over the course of that span. I dont know much of anything about investing, but I would like to start off with a provider or fund that I can tailor as my knowlege grows. Any advice would be much appreciated.
Nick, if you want to learn as you go and have access to a wide range of mutual funds with low expense ratios, then your best bet will probably be to go with one of the mutual fund houses such as Vanguard, Fidelity, or T. Rowe Price. If you don’t mind paying a little more, then you should consider a full service broker or financial planner who can give you advice based on your situation. Just be sure to go with a fee only planner, otherwise you might find that the financial advisor is recommending you purchase investments based on the commission he earns, not what is in your best interest.
I have a tiny Fidelity rollover IRA which I am planning to convert to a Roth IRA which they’ll let me do without making extra contributions. I would like to switch to Vanguard at some point when I have the extra cash to make the minimum deposit, but I’ve heard that Fidelity charges fairly large redemption fees. How can I find out what these are?
Bostoniangirl, Just call Fidelity and ask. Their customer service is very helpful and they will be able to tell you about any associated fees, and help you locate the documents where they are listed so you have a reference for later.
I was planning to diversify my ira accounts and open an ira with Charles Schwab. Does anyone here have any opinions with Charles? Thanks.
My choice was etrade. I care less about trade cost and more about automation, and etrade made that really easy.
I ended up going with Vanguard a long time ago – but my contributions are usually for index funds. I wouldn’t have gone with Vanguard for ETFs or individual stocks. Thanks for sharing.
I’m a big fan of just depositing my yearly amount into the Vanguard 500 and forgetting about it for the next 40 years. Probably the most passive investing ever!
Just signed up directly on their website, took about 15 minutes.
Ryan,
I am a 22 year old college student currently on a 6 month co-op. I pushed back my graduation due to the lagging economy, and thus, I will be graduating in spring of 2011. After reading your EXCELLENT information along with the informative comments from others, I want to consider opening a STAR Fund with Vanguard. I wish I had opened one sooner in my teens. My question to you is: Should I do this? I’m earning money at my co-op right now that I could be putting into a Roth IRA, but I don’t know if I should do this since I will need to pay off student loans once I am out of school. Also, I may try to go straight to Graduate school depending on whether the economy turns around in the next year or two, so that would be even more student loans. What are your thoughts on this? Should I go ahead and open a Roth IRA, or should I wait and make sure I am debt free (no student loans to pay off, etc.) first and then proceed? Thanks!
Evan, there is no right or wrong answer here, and there are pros and cons to both decisions. From an investing point of view, you will have almost 40 years of compound interest and gains working in your favor, so the potential growth of an investment made now, no matter how small the investment, is enormous. On the other hand, there is no quicker way to get into financial difficulties than by taking out too much debt.
But, there are middle grounds to the extremes listed above. For example, if you have reasonable fixed rate student loans, then you may find the payments to be fairly easy to handle. And if the interest rate is low enough, you may be able to make greater returns on your investments than you could if you were repaying fixed rate loans. For example, I have a friend with a fixed rate student loan at 2% interest. He is making the minimum payments on his loans and investing his extra cash flow (he has had these loans going on 10 years now). You might not get a 2% interest rate, but you may be able to defer your loans or get a low enough interest rate that investing will pay off in your favor.
You can also consider contributing to the Roth IRA and making withdrawals of the contributions (not gains on contributions) at a later date if you absolutely need the money. However, be sure you understand the Roth IRA Withdrawal Rules so you don’t get hit with taxes and penalties.
Balancing debt and investing can be a tricky endeavor and there is no one-size-fits-all approach. A lot of this will come down to your risk tolerance and willingness to stash away some cash for your future. I wish you the best of luck with your decision!
Dear Ryan,
I will be quitting my job in June to go back to Graduate School. I have around 30 k in my 401k that my company has with John Hancock.
I am planning to roll over to a Roth IRA, benefiting from the 2010 rollover.
My questions are the following
1. If I roll in 2010, will my tax bracket will be the one of 2011 ( when I have no income) or of 2010?
2. What would you say about John Hancock? I do not have any particular feeling about them, but know they will charge a fee if I leave. As I do not have much financial knowledge, I am not sure whether I should stay or switch to Vanguard or Fidelity.
Thanks for your help, and thank you for this very helpful blog !
Vero, good luck with your decision to go to grad school – I wish you the best!
1. Regarding the Roth IRA conversion: you can convert your 401k directly into a Roth IRA and pay the taxes based on 2010 income, or you can spread it out evenly and pay the taxes in 2011 and 2012 income. You would pay 50% of the tax in each year, and it will be based on that year’s income. Since you will be a grad student your income will probably be relatively low, potentially decreasing your tax bill if you were to pay it today. So it’s probably a good idea to spread out your tax bill over the next couple years.
2. The fees that John Hancock would charge would be the maintenance fees for your 401k plan because your company would no longer be sponsoring it. They probably have a provision that would allow you to convert your 401k into an IRA and you would then pay any associated fees for managing your IRA, if there are any fees. Most major brokerage houses don’t have any fees if you have a minimum amount of money with them, so you would probably be OK. That said, you can’t go wrong with either Vanguard or Fidelity, so look into those places and determine which firm has the best investment options for your needs.
Best of luck!
Hi Ryan,
Is there a reason (fees, etc) that you didn’t include Charles Schwab in your list of discount brokerages? I don’t want fees but don’t mind saving up for a minimum since I’m going to be doing that with Vanguard anyways.
The reason I ask is that I’m a big fan of their checking accounts which provide free ATM fee reimbursals which will come in handy when I travel. I was hoping that it would make transferring funds easier, somewhat like ING has with Sharebuilder. As a side note, do you know how long it would take otherwise to transfer funds?
Thanks!
Michelle
Michelle, There was no huge reason not to include Charles Scwab. They have some great products, and low fees. As you mentioned, they also have a variety of banking and investment products. They recently lowered the price of their individual stock trades as well, which makes them an even more attractive brokerage house for many investors.
You should be able to transfer funds very quickly within the Scwab family (savings/checking to investment account). I’m not familiar with the details, but most firms allow instantaneous, or nearly instantaneous, money transfers. You may wish to call them for more details before opening your account: 1-866-232-9890.
For other money transfers, it depends on who you use and how you do the trade. In most cases you have to actually have cash in hand before you can make a trade, which can take 2-3 business days for electronic transfers (in rare cases one or two days longer). Sending in a paper check can take even longer than that because it has to clear.
@Michelle. I’m loving my Schwab accounts. Yes, you can make same day transfers between checking and brokerage/IRA. I have the high yield checking linked to a regular brokerage account and a Roth IRA account, all with one login. Schwab is a great place to get started since they recently lowered their commissions and, most importantly, added a group a ETF’s that can be bought commission free. This is a really great deal! (Fidelity added access to some commision free ETFs a few weeks later.) These ETFs have lower expense ratios than even some of the highly acclaimed Vanguard funds. And since they are ETFs you can literally buy them one share at a time. It’s a pretty easy way to develop a well-diversified portfolio at very low costs. As an added bonus I just added the Schwab 2% Visa rebate card which deposits rebates monthly into my brokerage account. I love the consolidation.
Thank you for all the valuable information. It is so helpful in trying to sort out where to transfer the funds in my husband’s retirement account. Hindsight can be very expensive in these decisions.