Do you know what your income tax rate will be in the future?
The answer to that question will determine whether an investment in a traditional or Roth IRA is best.
If you think your tax rate will be lower in the future then it makes sense to avoid paying tax now through a tax-deferred investment vehicle like a Traditional IRA.
You enjoy a tax deduction today, boosting your monthly cash flow, helping your money grow more efficiently over time.
The downside to a Traditional IRA, though, is that when you withdraw the money, you will pay taxes on it as though it is regular income.
Plus, when you reach a certain age, you will be required to take minimum distributions.
Depending on your situation, your withdrawals from a Traditional IRA could cause greater financial difficulties than you thought — and Uncle Sam might get a bigger cut than you’d expected.
Opening a Roth IRA: Where to Invest
One of the great things about a Roth IRA is the fact that you can open one with virtually any reputable broker. You also have a great deal of flexibility in terms of the assets you can hold in a Roth IRA.
While there are some who hold precious metals, real estate, and even certain businesses in their Roth accounts, most consumers are better off using an approach that focuses on stock and bond index funds or ETFs. These assets are low-cost, easy to understand, and don’t come with a bunch of red tape.
Most online brokers will help you open a Roth IRA, and many of them offer low-cost fund choices. Additionally, many of them waive transaction fees when you sign up for an automatic investing plan and make monthly contributions, learn more about Roth IRA rules and contribution limits.
There is no shortage of discount brokerage firms that will let you open a Roth IRA with them. For most investors, the number of mutual funds or crazy ETFs you have access to really doesn’t matter. A basic, properly diversified portfolio can be constructed with any of the discount brokerage firms. This makes the main point of emphasis fees and transaction costs.
Ally Invest – Top All Around Roth IRA
Trade King was recently bought by Ally, and their services have been repackaged as Ally Invest. They’re lesser known than some of the big guys listed below, but the quality of their investment offerings and their top rated customer service make me highly recommend this deep-discount broker.
Ally Invest is online only, but their browser-based tools are intuitive and allow you to easily research your investments with customizable charting and real-time data.
What’s more, Ally Invest has absolutely one of the lowest stock trade commissions around at just $4.95 per stock trade or ETF trade. If you are looking to trade a lot within your Roth IRA, look no further. Mutual fund commissions are extremely low as well at just $9.95 per no load mutual fund trade. Additionally, Ally Invest has a collection of no-fee funds that you can choose from – although you still need to pay the expense ratio.
Betterment – Best Roth IRA for Hands Off Investing
In recent years, Betterment has made a splash in the world of investing. If you are a hands-off investor who wants to grow retirement wealth over time, Betterment might be the right choice for you.
Betterment is a different kind of brokerage firm aimed at those who don’t want to make decisions on specific mutual funds or ETFs. Betterment creates a portfolio for you based on your risk profile, using only stock and bond ETFs. You answer questions about your risk profile, and Betterment does the rest. You do need to sign up for automatic investing and commit to $100 per month in order to use Betterment.
Betterment also offers the ability to automatically contribute the maximum each year. Betterment will figure out how much you need to contribute each month to hit the maximum, and if the IRS raises the contribution limit, Betterment will automatically adjust your monthly contribution to match. This isn’t required, though, so if you can only start with $100 a month, that’s your choice.
Betterment charges a percentage-based fee on the total amount you have invested with the firm, ranging between 0.15% to 0.35% each year. The higher your account balance, the lower your fee. It’s a great choice for beginner investors because the percentage-based fee system can work out to be cheaper for smaller accounts than the flat rate fees of the other guys. As your account grows, you might want to move your money, but for the beginner, Betterment is an amazing choice. For more info, here is my full Betterment review.
Lending Club – Best Non-Stock Investments
Lending Club is the top peer to peer lender in the United States. Unlike the other brokerages on this post, Lending Club allows you to invest in loans that are made to other people. So, instead of investing through the bank, you get to be the bank.
The company has been around for more than 8 years and has funded over $16 billion in loans. I am personally getting just under 9% return on my investments in Lending Club and have been VERY happy with the results. Read more about that in my full Lending Club review.
You may be wondering, “Why the fees?”
The way Lending Club does a Roth is to partner with another company that sets up a self-directed Roth IRA. This allows you to direct your investments and not be limited to just stocks. These accounts require a little maintenance and that is a pretty standard annual fee if you only have a small balance in the account.
Another brokerage firm that mixes online discount trades with brick-and-mortar locations is TD Ameritrade. This brokerage has more than 125 locations around the country that you can walk into whenever you have a question you want to be answered in person. However, the online trading platform is easy to use, and you are likely to accomplish just about anything you want without assistance.
Trade costs are competitive on the stock and ETF side, with a cost of $6.95. It’s also worth noting that TD Ameritrade has a collection of commission-free ETFs. If you are trying to build a long-term retirement portfolio, using these ETFs can lower your costs, even though you will still have to pay the expense ratios.
You do need to watch out for the mutual fund charge of $49.99 per trade, however. That can be a real problem and erode the effectiveness of your portfolio. As I’ve stated in my full TD Ameritrade review, I love everything else about TD Ameritrade except the $49.99 no-load mutual fund commission. That is simply too high.
If you are going to build an ETF portfolio, I can still recommend the company as a solid option thanks to the competitive commissions on ETF and stock trades, as well as the option for in-person help.
When you think of online trading, E*TRADE is probably the company that comes to mind first.
The company has been around since 1992 and has constantly been pushing the industry to innovate trading technologies for customers.
Technically E*TRADE does have brick-and-mortar locations for you to go to, but there are only 30 in the entire country. E*TRADE is primarily an online discount brokerage firm, and they are an industry leader in this space.
E*TRADE offers a comprehensive suite of professional-grade trading platforms, allowing you to access accounts and market information from your desktop or phone – or even your Apple Watch©.
In trade for their awesome tools, E*TRADE’s fees are slightly higher than some of the other discount firms listed below. But here’s the trick to E*TRADE: there are more than 1,000 mutual funds available that come with no load and no transaction fee. Adding these to your Roth IRA will lower your fees. And then you get the best of both worlds; although you will still be responsible for the expense ratio charged on the fund. Check out my full E*Trade review for more information.
OptionsHouse is another great broker in the Roth IRA space. Don’t let the name deceive you: OptionsHouse does give you the ability to trade options, but it isn’t an options-only broker.
They have incredibly inexpensive trades at $4.95 per stock or ETF trade. Mutual funds aren’t as inexpensive, costing around $20.00 per trade. Learn more in my full OptionsHouse review.
Aside from the low trading prices, you can also make quick trades. OptionsHouse allows you to add options one the home screen. All you have to do is type the stock in, and then make one click.
Motif Investing offers another unique way to invest your money and instantly diversify your portfolio without spending hours researching companies.
Instead of having to buy stock in several different companies, with Motif Investing you can buy one “Motif” which has 30 different stocks in it. All of the stocks inside of the motif revolve around the same industry.
The best part about Motif Investing is the ability to buy a motif portfolio that has 30 stocks or ETFs with one simple trade for $9.95. You won’t be able to beat those trading fees anywhere. See my full Motif Investing review for more.
The benefits of Firstrade are obvious: low fees. But that isn’t the only thing that the discount brokerage offers to investors.
Thanks to Morningstar, Firstrade gives you plenty of information and research about stocks, EFTs, and mutual funds. On top of that, Firstrade offers a well-designed site that is simple to navigate, making it easy even for those who have never invested online.
If you’re looking for a brokerage that gives you flat fees of less than $5 – or $10 for mutual funds – while also providing plenty of tools, Firstrade is the place to go. More thoughts are available on my full Firstrade review.
Firstrade is not the fanciest and won’t have all the bells and whistles, but they get the job done, and they do it without all of the massive fees.
Firstrade has a couple of promotions. The more money you deposit in your account, the more you’ll earn in cash and free trades.
USAA – Best Roth IRA for Military and their Families
USAA provides a variety of services and accounts for military personnel and their families. If you or one of your family members has ever been a part of any military service, you should be able to open an account with USAA.
While USAA’s trading fees might be a little higher than other options, they offer just about any insurance or financial product you will need. As a result, USAA offers the ability to have all of your accounts and policies bundled with a single company. Moreover, if you have the premium account, you will have a lot of fees waived, and your trading fees will be even lower.
As an investor or account holder, you should have no worries about the financial stability of the company. They have been in business since 1922, making them an excellent resource for any active military, retired military, or family members.
Scottrade is an online and brick-and-mortar discount brokerage firm, which is one of the reasons why I like it so much.
Not only do you get relatively inexpensive trading costs, but if you ever want to sit down with a live human being, you can at one of Scottrade’s 500+ branches around the country.
The firm has kept their trade costs steady at $7 per stock and ETF trade for years. Mutual fund trades vary based on the type of fund with a maximum trade commission of $17. If you construct a Roth IRA based on ETFs, you can get the lowest possible transaction fee. Read more in my full Scottrade review.
Looking for tools to help you invest? Scottrade has what you need.
They have plenty of data, indicators, and real-time streaming quotes. They want all of their investors to have the info they need.
Charles Schwab is an interesting company that is really a full-service brokerage that is trying to play in the discount brokerage space. For stock and ETF trades, it does this well with an $8.95 commission on those trades.
But if you thought TD Ameritrade’s $49.99 mutual fund commission was high…Schwab charges $76. That is unbelievable. Only open a Roth IRA with Schwab if you plan to build a portfolio of ETFs, not mutual funds.
If you are looking for invest/customer support, Charles Schwab should be your go-to. Not only do they have 24-hour phone support, but you can also chat with agents and customer service representatives.
If you live close to one of their branches, you can go to their complimentary workshops.
Alternative: Skip the middleman and invest directly with a top mutual fund company
Discount brokers and full-service brokers charge fees on every trade into a stock, ETF, bond, or mutual fund. These brokers will tout no-fee mutual funds (also called no-transaction fee mutual funds) to show that they aren’t out to make a buck on every transaction you have for retirement.
But the number of no-fee funds offered is drastically different than the advertised number of mutual funds that attracted you to the broker in the first place. (Also, don’t get confused between no-transaction fee and no-load mutual funds. No-load funds mean there is no sales load cost as a percentage of assets on your investment; no transaction-fee means there is no fee to trade in and out of the mutual fund. No-load funds can have transaction fees, and vice versa.)
The easiest way to avoid unnecessary fees on your mutual funds is to simply cut out the middleman. You don’t need 10,000 different mutual funds, nor do you need to pay for every transaction you have to buy or sell into those funds. A well constructed portfolio of low cost index funds can offer you the best returns at the lowest cost.
Cutting out the brokerage middleman means going directly to the source: the mutual fund companies themselves. Not every mutual fund company will let you open a Roth IRA with them, but some of the largest will. Vanguard, T. Rowe Price, and Fidelity let individuals open Roth IRAs and deal directly with the companies to build their nest eggs.
Vanguard has long been an industry leader in low cost investments and the online account access is easy to navigate. The expense ratios on some of their index mutual funds are absolutely unbeatable.
Fees are clear to understand with Vanguard; we had to use the search function on the T Rowe Price website to discover the fee structure. Vanguard has an easily found link under the IRA portion of the website. Plus, we like Vanguard because the company is a non-profit dedicated to low investment fees.
- Fees for Roth IRA: $0 (with electronic statements and confirmations; otherwise $20)
- Minimum Required Investment: $1,000 for “starter” mutual funds, most other funds $3,000
- Minimum Subsequent Investment: Varies, usually between $100 and $1,000 (electronic transactions only have a $1 minimum)
- Commissions: If you invest in Vanguard mutual funds only, $0. Commissions vary for mutual funds outside of Vanguard or for ETFs.
T. Rowe Price
T. Rowe Price is another industry leader that offers mutual funds directly or through a broker. Expense ratios for index funds with T. Rowe Price are very competitive with the industry meaning you will get the maximum growth out of your invested dollars.
The company has a great Roth IRA page that explains everything you need to know about your eligibility to invest in a Roth IRA. The fee structure is mostly clear, although to find the full fee prospectus I had to do a search on their website.
- Fees for Roth IRA: $0 (with electronic statements and confirmations; otherwise $20 if your balance is less than $10,000)
- Minimum Required Investment: $1,000
- Minimum Subsequent Investment: $100
- Commissions: If you invest in T. Rowe Price mutual funds only, $0. Commissions vary for mutual funds outside of T. Rowe Price or for ETFs.
Fidelity is another massive mutual fund company that offers its funds directly to investors and through brokerage firms. Of the three mutual fund companies, Fidelity has the highest minimum required investment for you to get started at $2,500. On the flip side, there is no minimum additional contributions after that.
Fidelity has been battling with Vanguard and T. Rowe Price on expense ratio costs meaning you will be getting very competitive expense ratios.
- Fees for Roth IRA: $0 for IRAs
- Minimum Required Investment: $0 (although most Fidelity mutual funds have a $2,500 investment minimum)
- Minimum Subsequent Investment: $0 for Fidelity mutual funds
- Commissions: If you invest in Fidelity mutual funds only, $0. Commissions vary for mutual funds outside of Fidelity or for ETFs.
Who Qualifies for a Roth IRA?
It’s important to establish that you qualify for a Roth IRA. The basic eligibility requirements for a Roth IRA include:
- You need to have earned income. If you are a stay-at-home partner, your spouse can make contributions to your Roth IRA. It’s also possible for minors to contribute to custodial Roth IRAs if they earn money from a job.
- You need to meet income requirements, based on your tax filing status. The IRS evaluates these requirements each year and can make changes based on inflation. Check with the current-year requirements or with a financial professional to see if you qualify.
As of 2016, you can contribute up to $5,500 to your Roth IRA each year. If you are age 50 or older, you can make an additional “catch up” contribution of $1,000 per year. The contribution limit changes, though, so it might rise in future years.
It’s also possible to convert a Traditional IRA to a Roth account, or to rollover a 401(k) into a Roth IRA. However, there are tax consequences associated with this decision. You will have to pay taxes on the amount you convert or rollover today, and that can mean a hefty tax bill. Consult with a financial professional before you make this type of conversion.
Building the Roth IRA Habit
Having trouble getting into the habit of sending money in to your Roth IRA? You’re not alone. All of the above companies provide some sort of automatic investment option. You simply tell the firm how much you want to invest, on what schedule, and in what investment and the rest happens automatically.
Automatic investing is one of the best ways to build your Roth IRA without having to think about building your Roth IRA.
How to Manage Multiple Investment Accounts
Of course, you may have investment accounts, Roth IRAs, and Traditional IRAs across several different companies. You have multiple logins to remember to check up on your investments, and having some understanding of your asset allocation is not easy.
Enter Personal Capital. The company aims to solve the problems of managing multiple accounts, tracking your asset allocation, watching the performance of your investments, and in general helping, you keep all of your financial tasks in order. With a slick web interface and mobile apps that work on iOS and Android, you can see everything together in one well-designed space. On top of that, Personal Capital offers a fee analysis to help you reduce what you pay.
The best part about Personal Capital? The software is 100% free.
Will tax rates really be lower later on?
With a mounting national debt, many people believe personal income tax rates will eventually be forced to increase. So, even if you think that you will have a lower income during retirement, you might still be in a higher tax bracket or have other tax considerations impacting your finances.
Even if the national debt issue is somehow solved, the government doesn’t tend to lower a tax once it is set.
If you think that tax rates are going to go up by the time you retire, the best retirement account for you to open if you qualify for it is the Roth IRA.
With a Roth IRA, you make your contributions with after-tax dollars. This means you pay your taxes on the money now. While it might mean a little less today, it can make a big difference in the future. This is because your money grows tax-free. When you withdraw from your account, it doesn’t register as income, so it doesn’t change your tax bracket or tax liability.
A Roth IRA can be especially beneficial to you if you are just starting your first job. Chances are that you won’t make very much. Your tax liability might be fairly low anyway, so paying taxes on your low income isn’t likely to be a huge burden to you today. Plus, you have even more time on your side to let compound interest work its magic on your behalf.
There is no reason to put off investing for retirement. Open a Roth IRA today with one of the best brokers. It’s easy, inexpensive, and your future self with thank you.
How to Open a Roth IRA
- Make sure you qualify to start a Roth IRA under the Individual Retirement Agreement tax law of the United States.
- Pick which brokerage meets your needs for starting a Roth from the list below (ex. TD Ameritrade is best for ETF investors and Vanguard mutual funds and for beginners).
- Go through the process of opening an account with that brokerage
- Set up funding for your account with your bank (large banks like Bank of America and Wells Fargo work best).
- Transfer money from you bank account to your Roth IRA
- Pick your investments and fund them with the money in your Roth account.
- Repeat Steps five and six up to $5,500 a year or $6,500 a year if you are over 50.
Summary: What are the Best Roth IRA account providers in 2018?