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 gives 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.
Best Places to Open a Roth IRA
If you want to invest in individual stocks, one of your main concerns will be the cost per transaction. Platforms such as those listed below offer low-cost stock trades to meet most investors’ needs.
The following discount brokerages, robo-advisors, mutual fund companies, and other investment platforms offer unique features that may make them a better option for your situation.
Ally Invest – Best Overall Roth IRA Brokerage
Several years ago, Ally Bank, one of the top-rated online banks, acquired TradeKing, which was one of the best overall discount brokerages. The merger resulted in Ally Invest, which is our top-rated IRA brokerage.
The merger of two award-winning financial services firms equals a big win for consumers. I was a TradeKing customer for almost ten years before the merger, and I now have a combined Ally Bank / Ally Invest account. The merger went very smoothly and is a net benefit to customers.
Ally Invest offers commission-free stock trades, free trading tools, free access to Maxit Tax Manager, a learning center, and a community where investors can share tips and information. To top it off, Ally Invest offers an automated trading platform, Ally Invest Managed Portfolios.
Ally Invest Roth IRA account features:
- $0.00 stock trades – Commission Free!
- No custodial fees, no minimum balance for Roth IRA accounts.
- Read Ally Invest Review.
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 best place to get a Roth IRA for beginners. 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 your 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
E*TRADE – Best Roth IRA Account Tools
E*TRADE has won numerous awards, including the rating as the #1 Online Broker by Smart Money Magazine. 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 also recently launched their own automated trading platform, E*TRADE Core Portfolios, making it another option for those who prefer a more hands-off experience.
Finally, E*TRADE recently eliminated commissions for US-based stock, Exchange Trade Funds, and options trades. This is a major benefit for investors as it significantly reduces the cost to invest with E*TRADE.
E*TRADE Roth IRA account features:
- $0.00 trades for US Stocks & ETFs.
- Full feature bank.
- No custodial fees with electronic statements, no minimum account balance.
- Read our E*TRADE Review for More Information.
- Visit E*TRADE To learn more
Fundrise – Best App for Real Estate Diversification
Fundrise has made waves in recent years as an investing app that lowers the barriers to entry into the real estate market and reporting returns that outpaced the S&P 500.
Traditionally, real estate investing has been reserved for those who a) have significant capital to use, and/or b) are okay with taking on significant risks in order to achieve significant returns.
Fundrise mitigates these issues by allowing users to partner with other investors by pooling their money together to invest in real estate developments.
Recently, Fundrise has partnered with Millenium Trust Company to offer these same real estate investing options within IRA accounts.
For those looking to diversify their IRA accounts with real estate investing, Fundrise is definitely an option to consider.
TD Ameritrade – Reliable With Many Options
Like E*TRADE, TD Ameritrade also eliminated commissions for online stock, ETF, and option trades for all new and existing clients. Free stock trades are an attractive feature.
TD Ameritrade offers over 35 years of experience, more than 275 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 ResearchTeam™. 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 $0.00 commissions on every Internet equity trade.
- Over 2,300 commission-free ETFs selected by Morningstar Associates.
- Over 275 local branches.
- No minimum initial deposit required to open an IRA.
- No IRA maintenance fees.
- Read our TD Ameritrade Review.
- Visit TD Ameritrade to Learn More.
Lending Club – Alternative, Non-Stock Investments
A new one to the list is Lending Club, who is actually a peer to peer lender here in the U.S. This type of investing is a bit different than others on this list because you actually invest in lending, not stocks or mutual funds.
You get to play the banker! But, do understand the risks of this type of investing, as well as the fees.
First, the account creation is a bit different because Lending Club doesn’t hold the investment vehicle for you. They actually create a new, self-directed Roth IRA account with another company, where they just charge an annual fee for doing so. You can then have more than just stocks in your Roth IRA.
Of course, if you’re not trading stocks and mutual funds, you won’t have those trading commissions to worry about.
Here’s the quick break down:
- $100 account creation fee
- No trade fees
- No commission fees
- $100 annual fee
- Learn more or open an account at the Lending Club website
Schwab – Best for Active Traders
If you want to be an active trader with your investment portfolio, then Charles Schwab could be an excellent option for you. It’s important you find a company that offers less trading fees and minimal fees.
Schwab has $0.00 stock trades and plenty of tools. They also have a lot of no-transaction-fee mutual funds and commission-free ETFs, which is a great option for anyone who is looking to make the most of their portfolio by minimizing fees.
- Low stock trade fees
- $1,000 account minimum
- $100 promotion for new clients
Wealthfront – Hands-off Investors
Maybe you don’t want to be as involved with your investing, don’t worry, there are plenty of options for those that want to just kick back and watch their money grow. One of the best is Wealthfront.
Much like Betterment, Wealthfront has robo-advisors who will manage your account for you. If you don’t want to manage your account, the robo-advisor will invest your money based on your risk tolerance and your financial goals. The get started with Wealthfront, all you have to do is answer some questions about your finances and your goals. After that, the program will handle everything for you.
Now for the fees.
Wealthfront is going to charge you a 0.25% management fee, but it’s waived for the first $10,000 you invest. With their special promotion, you can get $15,000 worth of assets managed without any fees. It’s important to note you’ll need to have at least $500 in your account.
- Hands-off investing
- Fees waived for $10,000 worth of investing
- Affordable management fees
- Read our Wealthfront Review.
Merrill Edge – Casual Traders
If you’re looking for an all-around good brokerage with excellent customer service, look no further than Merrill Edge.
They are a part of the parent company, Bank of America, which means you can log into your Bank of America account, and your Merrill Edge account, with one login. Not only this, but you can also get investment help at over 2,000 Bank of America locations across the United States.
- $0 Account Minimum
- Decent Trade Rates – $6.95
- Excellent Customer Service Reviews
Obviously, they don’t have the lowest rates on the market, but they have several other benefits which set them apart from the competition. One thing is their customer service. They have 24/7 support you can access over the phone, through chat, or email. You can also schedule appointments to meet with financial advisers at most Bank of America locations.
Another thing that sets Merrill Edge apart is the research tools they offer. They have the Bank of America Merrill Lynch Global Research, as well as several third-party tools that you can use to make the best decisions for your portfolio.
Vanguard – Lowest Expense Ratios
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. Vanguard also has a full-featured brokerage account in which you can invest in individual stocks, ETFs, and similar investments.
Their selection of index funds and ETFs is particularly competitive when it comes to low expense ratios. I have been with Vanguard for over a decade 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 – Best Fee-Free Mutual Funds
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 a 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 – Best for Investors with $10,000
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 the 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.
Index funds and mutual funds are often the best investment option for 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.
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.
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 several main categories:
- Mutual Fund Companies and Brokerage Firms
- Robo Advisors
- Peer to Peer Lending
- Real Estate Crowdfunding
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, discount brokerage, or other IRA provider.
Mutual Fund Companies vs. Brokerage Firms
For most people, mutual fund companies and the large brokerage firms are the best options because they offer a wide variety of investments with low expense ratios and low commissions. These firms primarily offer low-cost index funds and mutual funds, though some also offer the ability to trade individual stocks or ETFs. Some of the large brokerage firms may charge more for individual stock trades than discount brokerages, such as Ally Invest, E*TRADE, and some of the others listed below.
A discount brokerage firm may be a better option for more experienced investors or those who may wish to invest more frequently with individual stocks, ETFs, and other index funds. Commissions for individual stock and ETF trades are generally lowest at discount brokerage firms.
Robo Advisors are automated investment platforms. Examples include Betterment, Wealthfront, M1 Finance, and some others. Many large brokerage firms such as E*TRADE and Ally Invest also offer their own automated trading platforms.
Robo advisors will automatically invest your funds based on your target risk tolerance and asset allocation. The benefits include a hands-off investing experience, less worry about how you “should be investing,” and some robo advisors also offer tax-loss harvesting, which may help your tax bill if you invest through a robo advisor in a taxable investment account.
Peer to Peer Lending
P2P lending allows individuals to loan money to other individuals through an online platform. Popular firms include Lending Club and Prosper. There are also some peer to peer lending firms that specialize in small business loans. When you participate in P2P lending, you make small loans to individuals that are paid off over time. This diversifies your risk by spreading out your investment over multiple small loans.
Real Estate Crowdfunding
Many people want to invest in real estate inside their IRAs. One way to do this is to set up a custodian to manage your Roth IRA. Another way is to make real estate investments through a crowdfunding site such as Fundrise, Realty Mogul, and similar companies. These companies allow investors to make small real estate investments in multiple properties, making real estate investment an approachable goal for just about anyone.
2022 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 Roth IRA income requirements and phase-outs for 2022:
- For single filers, phase-outs begin at $129,000 and end at $144,000. 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 $144,000 cannot contribute to a Roth IRA directly at all, while those who earn less than $129,000 can contribute the full amount.
- For married couples filing jointly, phase-outs begin at $204,000 and end at $214,000. If your income falls between those two figures, your maximum contribution begins phasing out. If you earn less than $204,000, you can contribute the maximum amount to your Roth IRA. If you earn more than $214,000, you cannot contribute to a Roth IRA directly at all.
The following table shows the Roth IRA income limits in an easy to read format:
|2022 Roth IRA Income Limits|
If Your Filing Status Is...
|And Your Modified AGI Is...||Then You Can Contribute...|
|Married Filing Jointly or Qualifying Widow(er)||$204,000 or less||up to the limit|
|more than $204,000 but less than $214,000||a reduced amount|
|$214,000 or more||Zero.|
|Married Filing Separately and You Lived with Your Spouse at Any Time During the Year||less than $10,000||a reduced amount|
|$10,000 or more||Zero.|
|Single, Head of Household, or Married Filing Separately and You Did Not Live with Your Spouse at Any Time During the Year||$129,000 or less||up to the limit|
|more than $129,000 but less than $144,000||a reduced amount|
|$144,000 or more||Zero.|
Roth IRA Contribution Limits
For those who are able to contribute the maximum to a Roth IRA each year, the contribution level remains relatively constant. In 2022, persons under age 50 can contribute up to $6,000 across all of their IRA accounts.
Those ages 50 and over can contribute an additional $1,000 in what is known as a “catch up contribution,” for a total of up to $7,000. See IRS Pub 590 for more info.
Backdoor Roth IRA
As we mentioned, there are several limits on how much you can contribute to your Roth IRA based on your income. There are a couple of ways you can get around those restrictions; that’s where a backdoor Roth IRA comes in.
A backdoor Roth is a conversion of a traditional IRA to a Roth IRA.
Anyone can convert their money from an IRA to a Roth IRA, regardless of how much they make. Even if your traditional IRA has more than the limit of a Roth IRA, you can still roll into over into a Roth IRA.
It’s important to note you’ll have to pay taxes on any money in your traditional IRA when you convert it.
There are two main ways you can utilize a backdoor Roth IRA.
- The first way to put money in a traditional IRA, sell shares, and then transition that move into a Roth IRA account.
- The other way is to convert the whole account to a Roth IRA Account.
The brokerage can help walk you through this process and ensure everything is handled correctly.
Using this technique, you can get around the Roth IRA income limits and the Roth IRA contribution limits. This is a great way to get the most out of your IRA accounts and ensure you reach your financial goals.
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:
1. Roth IRAs Help Diversify Your Future Tax Liability
Because Roth IRAs are funded with after-tax dollars, you won’t have to pay taxes on distributions when you begin withdrawing money for retirement. This makes a Roth IRA a smart way to diversify your future tax obligations since most traditional retirement accounts have the opposite tax rules – you save taxes when you contribute to the retirement account, but you pay taxes upon withdrawal in retirement. Note: Some firms also offer Roth 401k plans, which can also help diversify your retirement income streams.
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 compare Roth and Traditional IRAs to get a better idea of how these plans differ.
2. You Can Invest More for Retirement
We all know you can contribute up to $120500 to an employer-sponsored 401(k) or 403(b) in 2022, 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 retirement 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.
3. Withdraw Contributions at Any Time – Without Penalty
A lot of people don’t know this, but you can actually withdraw your Roth IRA contributions at any time. Notice it says contributions, because you cannot withdraw earnings before retirement age without paying a significant penalty and taxes.
If there is any chance you might need to access some of your retirement funds before retirement, having a Roth IRA that allows contribution withdrawals 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. Be sure to read up on Roth IRA withdrawal rules or consult with a tax professional before taking out any of your hard-earned money.
4. You Can Keep Contributing Well Past Retirement Age
Where some retirement accounts don’t let you contribute after age 70½, 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.
5. No Required Minimum Distributions (RMDs)
Unlike other retirement accounts that require you to take RMDs, or required minimum distributions, when you reach 70½, 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.
6. 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.
Questions to Ask Before Opening Your IRA
- Is there a minimum initial investment to open an IRA?
- Are there minimum contributions?
- What types of fees are charged and how much are they?
- Can fees be avoided with minimum account balances or by receiving electronic statements?
- Does the company offer the option to make automatic contributions?
- Which investment options are available? Stocks, Bonds, Mutual funds, ETFs, CDs, other?.
You should be able to get the answers to most of these questions online unless you are opening an account with an independent financial planner, who may or may not have this information online.
If the information is not readily available online, give the financial institution a call and ask for an information packet before opening an IRA.
It’s a good idea to review the fees and other details prior to opening your IRA; that way you have a good idea of what kind of fees and other expenses you can expect to pay.
All things being equal, go with the company or broker you feel most comfortable with. And if you later decide that you don’t prefer the financial institution where you opened your IRA, you can always transfer it to another financial institution.
The brokers there will be happy to help you fill out the paperwork.
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.
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.