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, giving investors the opportunity to invest for long term growth, and not pay any taxes on their qualified Roth IRA withdrawal in retirement age.
Opening a Roth IRA is also very easy, all you need to do is fill out a form or two and make a contribution. The most difficult part about opening a Roth IRA is deciding where to open your account, and which investments to purchase. I can’t tell you which stock, bond, or mutual fund to purchase, but I can show you a few of the best Roth IRA companies where you can get started.
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.
TradeKing – Best Overall Roth IRA Brokerage
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.
Scottrade – Best Overall Customer Service
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 also features advanced trading tools, low cost commissions, free tax management tools, and much more. Scottrade Roth IRA Account Features:
- Local branches.
- $7 stock trades.
- No custodial fees, no minimum balance for Roth IRAs accounts.
- View our Scottrade Review.
- Open an IRA with Scottrade
E*TRADE – Best Roth IRA Account Tools
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.
- $9.99 stock trades.
- No custodial fees with electronic statements, no minimum balance for Roth IRAs accounts.
- Read our E*TRADE Review for More Information.
- Open an E*TRADE Roth IRA. No Fees. No minimums.
Betterment – Best Roth IRA for Beginning Investors
If you’re looking for a great place to open up a Roth IRA that you don’t have to worry about, Betterment is the place to go. While they are one of the newer investing sites, they are also one of the most interesting.
Betterment is the top robo-advisor brokerage in the country. With Betterment, all you have to do is set up an account, set you goals, and determine your risk preference, after that, the robo-advisors will handle the rest.
Because Betterment uses an algorithm instead of actual financial advisors, they can keep their fees low, while still offering excellent services. If you don’t mind trusting your investments to a bunch of complex mathematical equations, Betterment is a great option for anyone looking to open up a Roth IRA.
With a Betterment account, you’ll enjoy plenty of features:
- Tiered fee system
- Variety of online tools
- Automatic investing
- Easy-to-use, even for beginning investors
- Read Betterment Review
- Open an IRA with Betterment
TD Ameritrade – Reliable With Many Options
TD Ameritrade offers over 35 years of experience, more than 100 local branches, and multiple awards, including 4 ½ out of 5 stars for Long-term Investing from Barron’s and rated “best broker for your IRA” by Kiplinger’s. You can easily link your account to TD Bank and you can have access to flat rate commissions on all trades, independent research as well as access to research from industry leaders like S&P, Morningstar Associates and ResearchTeamTM. You can download their trading platform to your desktop or laptop, use the web browser interface, or their mobile trading platform. To top it off, there are no account minimums or maintenance fees.
- Flat-rate $9.99 commissions on every Internet equity trade.
- Over 100 commission-free ETFs selected by Morningstar Associates.
- Over 100 local branches.
- No minimum initial deposit required to open an IRA.
- No IRA maintenance fees.
- Read our TD Ameritrade Review.
- Trade free for 60 days when you open a new TD Ameritrade account.
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.
How to best manage your IRA? It can be difficult to manage your IRA if you have multiple retirement or investment accounts. I use and recommend Personal Capital, which is a free online tool that helps you track your spending and investments and gives you an in depth view of how your accounts are allocated. This makes it easy to “see into” your portfolio and makes it easier to balance your investment portfolio. Learn more in our review, or Open a FREE Personal Capital account today.
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 $10,000 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 and additional contributions are a minimum of $100.
- Minimum investment. $1,000.
- Commissions. No-load funds with no sales charges or commissions for T. Rowe Price funds; early redemption fees may apply.
- Account fees. $20 for IRA if under $10,000. Can be waived if individual maintains $50k or more with T. Rowe Price.
- Who is this account for? This account is best for investors who already have at least $10,000 they can invest in an IRA with T. Rowe Price, so they can avoid the annual fee.
- 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.
Roth IRA Rules
While I believe everyone could benefit from a Roth IRA, not everyone is able to open this account due to stringent maximum income requirements enacted by the federal government. Here are the income requirements and phase-outs for 2016:
- For single filers, phase-outs begin at $117,000 and end at $132,000. If your income falls between those amounts, you can contribute limited funds to your Roth IRA each year. Meanwhile, single filers who earn more than $132,000 cannot contribute to a Roth IRA directly at all, while those who earn less than $117,000 can contribute the full amount.
- For married couples filing jointly, phase-outs begin at $184,000 and end at $194,000. If your income falls between those two figures, your maximum contribution begins phasing out. If you earn less than $184,000, you can contribute the maximum amount to your Roth IRA. If you earn more, you cannot contribute to a Roth IRA directly at all.
For those who are able to contribute the maximum to a Roth IRA each year, the contribution level remains relatively constant. In 2016, persons under age 50 can contribute up to $5,500 across all of their IRA accounts. Those ages 50 and over can contribute up to $6,500 in what is known as a “catch up contribution.”
Why Everyone Should Get a Roth IRA
Now that you know how much you can contribute and whether or not your income allows you to qualify, it’s crucial to understand the many benefits you can get from opening a Roth IRA. While the advantages can be different for everyone, some of the benefits work for nearly any individual from each income level. Here are six reasons everyone should at least consider a Roth IRA if they qualify:
Roth IRAs let you diversify your tax liability in retirement.
Since Roth IRAs are funded with after-tax dollars, you won’t have to pay tax on distributions when you begin withdrawing money for retirement. Since this is the opposite of your tax-advantaged accounts which will require you to pay income taxes at a future date, having a Roth IRA is a smart way to diversify.
Of course, no one has a crystal ball or the insight to know what taxes might look like years, or even decades, from now. Still, diversifying is one way to limit your exposure to potentially higher taxes in the future.
You can stash even more money away for retirement.
We all know you can contribute up to $18,000 to an employer-sponsored 401(k) or 403b in 2016, and that several retirement accounts for self-employed individuals may let you contribute even more. However, many people don’t know that you can put money in a Roth IRA in addition to those accounts.
If you are angling for a financially fruitful retirement, it helps to save as much as you can. Having several different types of accounts can help you reach that goal. Don’t limit yourself to your work-sponsored retirement plan and the limited options it may include. By opening a Roth IRA with one of the firms listed above, you can take at least part of your retirement planning into your own hands.
Withdraw your contributions at any time and without penalty.
A lot of people don’t know this, but you can actually withdraw your Roth IRA contributions at any time. You’ll notice we didn’t say earnings because you cannot withdraw your earnings before retirement age without paying a substantial penalty and taxes.
If you think you might need to access some of your retirement funds before you retire, having a Roth IRA that allows you to take out contributions without penalty is a smart move. Perhaps you’ll want to start a business, wind up needing to pay down considerable debt, or experience a health scare or medical emergency. You never know what might happen, but it’s nice to know you have access to your funds if needed.
You can keep contributing well past retirement age.
Where some retirement accounts don’t let you contribute after age 70 ½, the Roth IRA has no such requirement as long as you’re still earning an income. If you plan to keep working and want to keep beefing up your retirement funds, a Roth IRA can provide you with an avenue to do just that.
You will never have to take required minimum distributions.
Unlike other retirement accounts that require you to take RMDs, or required minimum distributions, when you reach 70 ½, the Roth IRA takes a different approach. With this account, you can keep it open for a lifetime and never withdraw a single cent if you don’t want to. Because of this, many experts believe the Roth IRA is one of the most versatile retirement accounts in existence.
Leave a tax-free inheritance to your heirs.
Since Roth IRA accounts are funded with after-tax dollars, they can be passed on to your heirs in their post-tax form. In other words, your heirs can inherit your Roth IRA without having to pay income taxes or other taxes. If you’re worried about estate planning and leaving your children or other heirs with unmanageable taxes and red tape to wade through, this is an important consideration.
Opening a Roth IRA account is almost a no-brainer if your income makes it possible to qualify and you have the extra funds to stash away. With years until retirement – and the opportunity for your money to compound – a Roth IRA can move you much closer to retirement success.
However, it’s still crucial for you to conduct due diligence before you open an account. Make sure you read the fine print, understand all terms and conditions, and have a grasp on the ongoing maintenance and account fees you’ll be charged along the way. While investing in a Roth IRA is nearly always a smart move, you will be better off going with a firm that charges minimal fees and offers the level of customer service you deserve.