It’s very likely that you’ve heard the term “Roth IRA” bandied about in different places, whether from the droning tones of your HR vice president’s voice or through print pieces with bold headlines: “101 Ways a Roth IRA Rocks.”
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Quick look: Best Roth IRA Brokerage
- Best overall: TD Ameritrade
- Best for low fees: Ally Invest
- Best for beginners: Charles Schwab
- Best for no account minimum: Fidelity
- Best for customer service: Merrill Edge
- Best for number of investment options: E-Trade
And really, a Roth IRA is an amazing thing for many who qualify.
A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules stipulate that as long as you’ve owned the account for five years and you’re age 59 ½ or older, you can withdraw money when you want without paying federal taxes
- Why do I need a Roth IRA?
- How do Roth IRAs differ from traditional IRAs?
- Who qualifies for a Roth IRA?
- Contributions to a Roth
- How to make the switch to a Roth IRA
- Which is best: Discount or full-service brokerage?
- Best overall
- Best for beginners
- Best for no account minimum
- Best robo-advisor
- Best for low fees
- Best for lifecycle funds
- Best for educational resources
- Best for tools
- Best for customer service
- Best for number of investment options
- Final thoughts
Why do I need a Roth IRA?
A Roth IRA is a wonderful investment vehicle when you believe your taxes will be higher in retirement than they are right now. That’s why it’s a great option for young people who have just started their first job, because it’s very likely that their taxes will be higher in retirement.
In addition, you can withdraw your contributions at any time without taxes or penalty. You can use up to $10,000 to purchase a first home for yourself or certain family members. In addition, you can pay higher education costs for yourself or a family member. (You’ll still pay income taxes if you withdraw earnings early, however.)
How do Roth IRAs differ from traditional IRAs?
Roth IRAs differ from traditional IRAs in several ways:
- Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. Essentially, you avoid taxes when you put money into a traditional IRA; with Roth IRAs, you avoid taxes when you take money out in retirement.
- There are income limits for Roth IRAs but not traditional IRAs.
- Traditional IRAs require you to take mandatory, taxable withdrawals of a certain percentage of your funds at age 70 ½. Roth IRAs do not mandate withdrawals.
Before you open an account, you may want to understand the difference between a Roth IRA, a traditional IRA, and a 401(k), too. This should make it easy.
|Features||Roth IRA||Traditional IRA||401(k)|
|Tax benefits||Tax-free growth and qualifying withdrawals||Tax-deferred growth and tax-deductible deposits||Employer-sponsored savings, save & invest pre-tax earnings|
|Age requirements||No requirement||Must be under 70.5 years old to contribute||21 years old|
|Contribution limits||$5,500 for those under 50 years old, $6,500 for those 50+||$5,500 for those under 50 years old, $6,500 for those 50+||Employees can contribute up to $18,500 (not including employer match)|
|Income limits||Depends on marital status and adjusted gross income||No||No|
|Taxes on withdrawal||No||Yes||Yes|
|Taxes on deposits||Yes||No||No|
|Early withdrawal penalty||Yes, pay taxes on amount plus 10% penalty||Yes, in some cases a 10% penalty||Yes, pay a penalty|
|Required withdrawals||No||Yes, by age 70.5||Yes, by age 70.5|
Who qualifies for a Roth IRA?
Anyone who earns income and meets certain income requirements can qualify for a Roth IRA.
- Single tax filers must have modified adjusted gross incomes of less than $135,000 in 2018 to contribute to a Roth IRA. Contribution limits are phased out starting with a modified adjusted gross income of $120,000 in 2018.
- Married couples filing jointly must have modified adjusted gross income of less than $199,000 in 2018 in order to contribute to a Roth; contribution limits are phased out starting at $189,000 for 2018.
Contributions to a Roth
- Contribution limits: For 2018, contribution limits for Roth IRAs are $5,500 and $6,500 for those who are 50 or older.
- When can I contribute? When you’re sure you’re eligible (you meet the income requirements) and you’re ready to pull the trigger on a brokerage account, you can set up monthly transfers from your bank account to your Roth IRA. If you’d rather make one annual contribution, you can do that as well.
How to make the switch to a Roth IRA
It’s easy to convert to a Roth IRA, provided that it makes good sense for you financially. That is, if you believe your future tax rate will be higher than your current tax rate in retirement, it makes sense to switch to a Roth.
To convert to a Roth, the simplest method is to tell your already-existing financial institution to designate your existing traditional IRA that you’d like to switch it to a Roth. Or, at your job, switch from your 401(k) to a Roth 401(k).
Overall, most employers or financial institutions make it easy to convert to a Roth. If you feel it’s for you, ask some questions and you’ll be set on a path to a tax-free retirement.
Which is best: Discount or full-service brokerage?
If you’re trying to decide between a discount or full-service brokerage, there are a few differences–and of course, it depends what you’re looking for.
- Brokerage accounts allow you to buy and sell stocks, bonds, mutual funds, ETFs, etc.
- Full-service brokers offer more products and services, including planning for retirement, tax advice, and portfolio review. Because services are more comprehensive, typically, fees are a bit higher with full-service brokerages.
TD Ameritrade has it all–low fees, an array of resources and a lot of accolades.
TD Ameritrade offers top-notch IRA tools and resources, including:
- Videos on various retirement topics, for both beginners and advanced investors
- A range of tools and calculators, including a handy IRA selection wizard.
- A retirement planner, which determines the amount investors need to save each year to adequately prepare for retirement.
TD Ameritrade’s setup, IRA, termination, account maintenance fee, and account inactivity fees are all $0. TD Ameritrade does charge $75 for an outbound full account transfer (ACAT) fee and $25 for an outbound partial account transfer fee.
In addition, TD Ameritrade promises assistance from its experienced, licensed reps anytime, anywhere. The Client Services menu allows investors to access the mailing and email address, fax number and phone number for any investor who needs assistance and for whom would like to build a positive connection with a real person at TD Ameritrade.
Best for beginners
Charles Schwab is a great resource for beginners, especially if you decide to set up an automatic monthly transfer. If you automatically transfer (the best way to be disciplined) in at least $100 per month, the minimum initial investment of $1,000 is waived.
Charles Schwab offers a lot of support and educational resources for beginning traders. For example, check out Schwab’s Roth vs. Traditional IRA Calculator.
The biggest reason Charles Schwab is the best for beginning investors? Schwab offers great customer support. They feature around-the-clock customer support and more-than-adequate chat support as well. Schwab also has a large network of branches, where you can attend free workshops and meet with financial consultants by appointment.
Best for no account minimum
- Retirement investors
- Active traders
- Premium research
- Low fees
- No-transaction-fee mutual funds
Fidelity waives its minimum initial investment (though some mutual funds may require a minimum of $2,500) and Fidelity’s Roth IRA accounts are free. The company offers a wide selection of investment options, including stocks, bonds, mutual funds, ETFs, and certificates of deposit (CDs).
In addition, Fidelity’s Roth IRA accounts are free to open and there are no annual account fees. It is only $4.95 for online US-based equity trades, too.
The website features many tools, ideas, and strategies to help you prepare for your personalized needs retirement. The site is also well-organized and user-friendly, so it is easy to find tools, open the account, fund your account, talk to a customer service representative, and make changes to your account.
- Passive investors
- Lower fees
- Beginning investors
- Investors who don't want to manage money on their own
A great vehicle for passive investors, Wealthfront is one of the largest advisors with over $10 billion in client assets under management.
Wealthfront charges a flat 0.25%. Another reason Wealthfront is great for hands-off, fee-resistant investors is because Wealthfront charges no commissions whatsoever, so you never have to worry about your money being eaten away by commissions.
Wealthfront helps its clients determine how much money to invest to realize their financial goals in a way that’s in line with their risk appetite. To that end, robo advisors help optimize asset allocation, automate tax loss harvesting, and rebalance portfolio when the market changes.
In addition, robo advisors such as Wealthfront also automatically rebalance a portfolio automatically without any additional commission cost to the client.
Best for low fees
Ally Invest requires no setup fee for Roth IRAs, no annual fee and no minimum requirements to start a retirement account. (In fact, Ally Invest doesn’t require any minimum deposits to open any cash account.)
There is a minimal IRA conversion fee of $50 if you happen to want to convert from a regular IRA to a Roth. There is also a $50 transfer out fee and a $50 termination fee for distributions and full outgoing account transfers.
If you’re on the hunt for a Roth IRA, Ally Invest’s low pricing makes this broker worth looking into.
Beyond Roth IRAs: Compared to other well-known online brokerages, Ally Invest’s self-directed equity trade pricing, margin rates, and fees (including load and no-load mutual funds) are extremely competitive.
Best for lifecycle funds
If you’re looking for a single diversified fund that adjusts its asset mix over time, look no further than Vanguard’s pioneered Target Retirement funds.
Low fund expense ratios (the average is 13%), combined with no sales loads, sales commissions or account service fees (when you register for secure access to Vanguard’s website and electronic documents) make Vanguard a great choice.
However, the beauty of Vanguard’s Target Date are really the following:
- Less risk through broader diversification
- A professionally managed asset mix
- Automatic rebalancing (meaning you don’t have the pesky chore of realigning the weighting of all of your assets)
Depending on the approximate year you’ll retire, Target Retirement 2010-2060 funds are available in five-year increments.
Best for educational resources
TD Ameritrade is also well-suited to beginning investors because of its excellent educational resources. Its range of investing resources, such as articles and videos as well as streaming video and in-person events — all are accessible on TD Ameritrade’s mobile or desktop platforms.
For those just learning about Roth IRAs, TD Ameritrade offers excellent basic information on its website. There are tabs for those nearing retirement and in retirement on that same page.
In addition, TD Ameritrade also provides a branch locator on its website. By visiting a local branch, you can visit with the firm’s licensed representatives.
Client questions are answered 24/7 and wait times are usually brief, particularly during non-market hours. E-mail service is responsive as well with most messages returned in one business day or less.
Best for tools
- Retirement investors
- Active traders
- Premium research
- Low fees
- No-transaction-fee mutual funds
Fidelity claims it “takes the guesswork out of retirement savings” by offering several different options for tools, including the Planning & Guidance Center tool, which can provide you with a snapshot of your entire retirement picture.
You’ll see if you’re on the right track to the retirement amount you think you’ll need in retirement, review and evaluate different investment strategies, and receive a report with clear next steps for your portfolio.
In addition, there are tools and educational resources for you to learn about the following:
Also, whether investors/traders choose to use an Apple device or Android, Fidelity’s mobile trading is high-quality and offers a lot of different options for both types of device. The main screen for mobile offers cards for notifications, several news feeds, accounts, watch lists, an option to transact and more. It’s simple, clean and intuitive.
Best for customer service
- Commission-free trading
- Bank of America customers
- High-balance customers
- Investors who value customer service
- Penny stock traders.
Merrill Edge, a traditional brokerage, also works with Bank of America, which can make it much easier to make regular automatic transfers into your Roth IRA. Merrill Edge also has low-cost trades and the ability to work with financial advisors.
One area that Merrill Edge is excellent is in its attention to its customers, particularly those seeking guidance or insight into the basics of trading.
Merrill Edge’s 24-hour customer support call center has received high praise from users, and the amount of step-by-step educational and financial planning resources provided to Edge users is likely the best you will find anywhere.
Best for number of investment options
- Mobile traders
- Traders looking for research and data
- Investors looking for retirement planning guidance
If you’re looking to purchase certain securities in order to save for retirement, it’s likely that you can buy them on E-Trade.
E-Trade has thousands of options in stocks, bonds, mutual funds, ETFs, and more – so much that it may be overwhelming. But, because E-Trade also acts as a full-service brokerage, you can call and someone will assist for a fee.
Opening an account with E-Trade also means you may qualify for a promotion. Right now, if you sign up and fund your account, you could qualify for up to a $600 sign-on bonus and 60 days of commission-free trades.
Ultimately, if you’re in the market for a Roth IRA, there are so many great options in the marketplace. If you’re a savvy investor who knows the ropes, you’ll may make a much different choice than a brand-new investor–all it takes is a little research. Knowing what characteristics you prefer most, whether it be great educational resources or “no-thinking-necessary” target date funds.
When you retire, no matter your age now, you could be very pleased that you had the foresight to invest in a Roth IRA.