An individual retirement account (IRA) is an investment account that gives you amazing tax advantages for retirement savings.
The two common types:
- Traditional IRA. This account allows you to invest pre-tax income. You’ll rollover your 401k into a traditional IRA whenever you leave a job. Currently, anyone younger than 70 ½ -years old is allowed to contribute to a traditional IRA. Once you hit that age, you are required to take out a minimum withdrawal each year that is a specific percentage of your funds.
- Roth IRA. This account uses your after-tax money to invest, giving you an even better deal on your investment, as you’ll also pay no taxes on any gains when you withdraw on it. There are currently no age restrictions on a Roth IRA — however, there are income restrictions.
Currently, there’s a yearly maximum investment of $6,000 to both accounts ($7,000 if you’re more than 50 years old). A Roth IRA currently has an income limit of $135,000 for single tax filers and $199,000 for joint-filing married couples. A traditional IRA has no such limits.
However, these limits change often, so be sure to check out the IRS contribution limits page to keep updated.
Though there are advantages to both IRAs, we highly recommend you get a Roth IRA. It’s one of the best investments you can make as a young person. It’s simply the best deal we’ve found for long-term investing.
If Roth IRAs had been around in 1970 and you’d invested $10,000 in Southwest Airlines, you’d only have had to pay taxes on the principal amount. When you withdrew the money 30 years later, you wouldn’t have to pay any taxes on it…
…which is good because that $10,000 would have turned into $10 MILLION.
Overall, time is your best friend when it comes to your Roth IRA. And over many, many years, that’s an amazing deal.
The Top 5 Roth IRAs
Identifying the best IRA presents several challenges, so we have done the legwork to help you see the big picture. We have also provided some questions that can help you make the best choices in the future. You need to start investing in your retirement as early as possible, but you should also ensure that you choose the correct account to invest in. That is why we will help you find the ideal brokerage and recommend some of the best options you should consider.
Here, we’ve researched and listed some of the best IRA accounts of 2021.
Charles Schwab is one of the most reputable brokerage firms that allows you to create a Roth IRA account online. You do not have to worry about minimum account deposits or annual account maintenance fees since they are all free.
Some of the most significant benefits of a Charles Schwab Roth IRA account include:
- $0 minimum deposit
- access to extensive retirement planning tools
- access to trading platforms for active investors
- 24/7 customer service
- brick-and-mortar branches in case you need face-to-face support
- no commission fees for stock or aft trades
- no transaction fees for more than 4,000 mutual funds
You can also use the Robo-Advisor Schwab Intelligent Portfolios as an automated service option at no extra cost.
On the downside, you have to pay a commission fee for some transactions. The premium version of the Robo-Advisor Schwab Intelligent Portfolios have a one-time $300 planning fee and a monthly $30 fee for advisory services.
Fidelity Investments IRA
With a Fidelity Investments IRA account, you get an option that does not trade annual account fees or a minimum balance. You also access a wide selection of investment options. As a bonus, you get 500 free trades and several educational resources, including calculators and tools that indicate the progress of your retirement goals. It allows you to invest in mutual funds, stocks, ETFs, CDs, and bonds.
Some of the benefits of the Fidelity Investments IRA account include:
- a $0 minimum deposit
- no commission charges for ETF and stock trades
- zero transaction fees for more than 3,400 mutual funds
- educational resources and tools
- access to Robo-Advisor Fidelity Go (free for accounts with balances of less than $10,000)
- 24/7 customer service
- access to over 100 branches across the U.S.
On the downside, customers have to pay a 0.50% annual fee to talk to human advisors for accounts with less than $2M. Some Fidelity mutual funds also require accounts to reach specific thresholds. On heavy trading days, users get multiple reports of platform outages. Sweet balances between $10,000 and $49,999 have to pay a Robo advisor fee of $3 every month. Those with balances well over $50,000 pay 0.35%.
Are you looking to start a retirement plan without a minimum deposit? Betterment IRA is a great option. It allows you to access automatic rebalancing to help optimize the growth potential of your savings.
Betterment IRA account allows customers to benefit from:
- $0 minimum deposit and 0 transfer or trade fees
- effective automated investing
- customized user portfolios (depending on your risk tolerance, timeline, and financial goals)
- a quick and easy account setup process
- centralized access to all your accounts by syncing external retirement accounts to the Betterment retirement goal.
They also assign particular investment goals to every portfolio and invest using different strategies. If you choose the premium edition, you get unlimited access to a financial advisor that would cost you between $199 and $299 under normal circumstances.
Some of the advanced features of the Betterment IRA account include:
- automated rebalancing
- socially responsible investing
- tax-saving strategies
The most significant disadvantages of the Roth IRA account include a 0.25% yearly account fee and a 0.40% annual account fee for the premium plan. You need to maintain a minimum balance of $100,000 to qualify for the premium plan.
Vanguard is an excellent IRA option for anyone, especially given the 200 commission-free ETFs and mutual funds you can choose from and the zero to low fees associated with the account. Although it does not require a minimum deposit to create a Vanguard IRA account, you need $1,000 to invest in most of the retirement funds it offers. It offers no bonuses, but users gain access to various retirement planning tools and investment options, including stocks, bonds, CDs, ETFs, and mutual funds.
The account benefits include:
- $0 minimum deposit requirement
- zero commission fees for ETF and stock trades and
- $0 transaction fees for more than 3,000 mutual funds
- access to a wide variety of retirement planning tools
- access to GetHuman, a website that enhances human-to-human customer service
The downsides of the Vanguard IRA include a $20 account service fee (except for those who sign up for electronic statements or satisfy the minimum balance requirements), a $1,000 initial investment in most retirement funds. The Vanguard trading platform also doesn’t match up to others in the same category.
E*Trade has low trading fees, which most active investors look for. The costs for mutual funds can be different; it offers more than 4,500 mutual funds with no transaction fees and no loads.
Some other advantages of the E*Trade brokerage account include:
- no minimum deposit to create the account
- no commission fees for ETF and stock trades
- no transaction fees for more than 4,000 virtual files
- educational resources, including detailed videos and articles
If you are an active investor, you benefit from volume discounts on options and a robust mobile platform.
On the downside, E*Trade’s website is not user-friendly. You also have to pay $500 to open an account to access the Core Portfolios option.
Roth IRA FAQs
What’s the difference between a traditional IRA and a Roth IRA?
Traditional IRAs and Roth IRAs share a common similarity: They are both retirement accounts with tax advantages. The main difference between the traditional and Roth IRA is due to the time you claim the tax benefits associated with the account. With a traditional IRA, you get an upfront tax break when contributing to the account. A Roth IRA, on the other hand, defers tax savings until retirement.
Another difference also comes in when considering eligibility. You cannot contribute to a Roth IRA account if you earn higher than the income limits. Not the case with a traditional IRA account. If both you and your spouse do not qualify for workplace retirement plans, you can contribute to a traditional IRA account regardless of your income. However, you become ineligible if you or your spouse have a workplace retirement plan; you cannot make deductible IRA contributions at a specific income threshold. You can still benefit from tax-deferred gains and make nondeductible contributions, but you cannot take a deduction for your contribution in the same year you make it.
Both IRA accounts also have different withdrawal rules. Withdrawing from the traditional IRA before reaching 59 and 1/2 years means that you have to pay a 10% tax penalty unless you qualify for the exemption. With a Roth IRA, you can withdraw contributions made at any time without paying the penalty. However, you pay the penalty for early withdrawal if you withdraw the gains. After reaching 59 and 1/2 years, you can withdraw money from the traditional IRA at any given time without penalties. However, the Five-Year rule applies for does Linda Roth IRA accounts.
How do I open a Roth IRA?
Whether you choose to do it online or in person, you should not experience any challenges in opening a Roth IRA.
First, you should make sure that you qualify for one. In most cases, you are eligible for a Roth IRA provided that you earn income for the year. However, the income limits may vary depending on your modified adjusted gross income. Limitations also exist regarding the maximum amount you can put into a Roth IRA every year. You can use a Roth IRA calculator to determine the ideal amount you need to contribute to the account.
2. Choose an investment company
Next, you have to decide where to open your Roth IRA account. Almost every investment company offers are Roth IRA account. If you have an older traditional IRA, chances are you can get a Roth IRA from the same company. Always find out if you need to pay a fee to open or maintain the account. Also, enquire about customer service and whether you can access them through telephone or online. Another important consideration is the types of investment the company offers and how much it costs to trade.
After this, fill out the necessary paperwork. Most brokerages and banks have a webpage for IRAs where you can start the registration process. You can complete the registration process online, but you can also contact customer service if you need more information. Some of the standard details required for an application include:
- a form of identification
- your social security number
- your savings or checking account number
- your bank’s routing number
- the name and address of your current employer
- the name, social security number, and address of your plan beneficiary (always name at least one beneficiary so the account can pass to someone without going through probate)
4. Make an initial transfer
Set up an initial deposit by entering your bank information. Some brokers require you to make a minimum deposit so use a separate bank account in order to deposit money into the brokerage account.
Then, wait. The initial transfer will take anywhere from 3 to 7 days to complete. After that, you’ll get a notification via email or phone call telling you you’re ready to invest.
5. Choose your investments
Once you have completed the paperwork, choose your investments. The investment company will guide you through the opening of the account, but you need to decide how to invest the contributions that go into your Roth IRA. You can start by designing your portfolio by choosing from any of the available options offered by financial institutions. Also, buy a lifecycle fund or target date, which is basically an off-the-shelf portfolio provided by investment companies suitable for someone your age.
Alternatively, you can talk to a financial adviser.
6. Choose contributions and methods
To complete the process, determine how regularly you want to contribute to your Roth IRA. You can set up monthly transfers from your checking or savings account to the IRA account. You can also choose to make annual contributions provided that you meet the income requirements.
What are some of the benefits of an IRA?
IRAs are accessible and you can set them up quickly. You only use taxable income to contribute to a traditional IRA. You can create an IRA through most brokerage firms or banks in minutes.
IRA accounts also allow you to make the most of tax advantages. For traditional IRA accounts, you do not pay taxes on earnings of contributions until you can start making withdrawals from the account. The higher the amount you invest in the account, the higher your withdrawal during retirement. Roth IRAs, on the other hand, allow you to benefit from tax advantages during retirement. You make all contributions from after-tax income, so your withdrawals will not be taxed during retirement.
Invest in your IRA automatically
Finding a great IRA to begin investing is just the first step to saving for your future. If you REALLY want to build a financial system that’ll help you earn money passively, you need to automate your finances.
To help, our founder Ramit Sethi created a 12-minute video on how to do exactly that. Just enter your name and email below and he’ll show you how to create a personal finance system that’ll save and earn you money passively for years to come.
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