Roth IRAs have taken center stage as one of the most popular investment accounts. In fact, about one-third of investors have a Roth IRA, according to the Investment Company Institute, a trade association for national and international companies. This popular retirement account lets you save for your future by paying taxes on your contributions now and withdrawing them tax-free in retirement.
Roth IRAs have become especially popular among younger investors. Of these Roth IRA investors, nearly a third are under 40 and well over half are under 60.[Roth IRAs are] the crème de la crème of retirement accounts,” Cassandra Cummings, founder of The Stocks & Stilettos Society, told NextAdvisor. “Everyone has a bank account and a debit card. Everyone should have a Roth IRA.
If you’re considering opening a Roth IRA, we can help. We’ve rounded up our favorite places to open Roth IRA accounts and spoken with a few experts to find out how investors can get the most out of their Roth IRAs.
What is a Roth IRA and how does it work?
A Roth IRA – or Individual Retirement Account – is a tax-efficient investment account designed to help you save for your retirement. When you contribute to a Roth IRA, you do so with money that has already been taxed. Then your investments grow tax-free during your working years and you can withdraw the funds tax-free at 59 ½.
According to Stephanie Genkin, CFP and financial advisor at My Financial Planner, the tax advantage offered by the Roth IRA is what makes it such a popular option with investors.
“Growth tax-free for decades on an investment is very valuable,” Genkin said.
Roth IRAs have strict contribution limits. You can only deposit $6,000 per year if you are under 50 and $7,000 per year if you are over 50. Your modified adjusted gross income (MAGI) must also be less than $144,000 for the 2022 tax year and less than $214,000 if you’re married and filing jointly. If your income is more than that, you can still contribute, but you must follow the rules of a backdoor Roth IRA, which means opening a traditional IRA, investing the money, and converting it to a Roth IRA.
Best Brokerage Firms to Open a Roth IRA Account
To really grow your wealth, you must invest your money because saving alone is not enough. Investing is more accessible these days, as online brokers allow anyone to invest, often with no fees or minimums. The brokerages below all offer Roth IRAs. Here are our favorites to start with:
Don’t let analysis paralysis keep you from investing for your retirement. Whether it’s deciding between a traditional IRA and Roth IRA or choosing the right brokerage firm, it pays to start early.
Fidelity is one of the most popular online brokerages on the market and consistently ranks among the favorites of the experts we speak to. Fidelity offers several different Roth IRA options. With their most basic plan, you’ll choose all your own investments and won’t be charged any account fees. You’ll also have access to all of Fidelity’s great features, including robust planning tools, educational resources, and help from Fidelity representatives.
One of the things investors will love about Fidelity is its wide range of investment options. You’ll have access to the same standard individual stocks and bonds you’d find elsewhere. But Fidelity also offers a range of mutual funds and ETFs that charge low commissions and expense ratios, or fees (and some charge no fees). A good rule of thumb is to look for accounts that charge less than 0.2%. Avoid fees of 1% or more. It’s worth noting that a high expense ratio will eat away at your investment profits, so be sure to watch what they are.
Schwab is another of the biggest names in online brokerages and its Roth IRA has no account minimum to get started, meaning you can start investing with as little as you want. And like its closest competitors, Schwab offers some of the lowest expense ratios in the industry on its funds.
For example, its S&P 500 index fund has an expense ratio of just 0.02%, which is well below the industry average. Investing in an S&P 500 index fund is a great way to build wealth because your money is spread among 500 of the biggest companies in the stock market. This helps keep your money diversified and protected.
Schwab also has plenty of other features that new and experienced investors alike will love, like tons of educational resources and in-house investing tips whenever you need them.
Betterment is a great choice for investors who prefer a hands-off investment experience with their Roth IRA. Betterment is a robo-advisor, meaning it chooses investments on your behalf based on your financial goals, risk tolerance, time horizon, and other factors. Robo-advisors help simplify your investments by taking the guesswork out of investing.
Investors will appreciate that Betterment is fully automated. Once you’ve answered some key questions about your retirement goals, Betterment fully manages your portfolio, including rebalancing and adjusting your investments as you get closer to retirement.
Because Betterment is a robo-advisor instead of a self-directed Roth IRA, it charges management fees, which you’ll pay in addition to expense ratios for the low-cost ETFs it invests in. Betterment’s standard management fee is 0.25% of assets under management, which is still quite reasonable.
Vanguard is one of the first names people think of when it comes to investing online. His retirement accounts — including his Roth IRA — are among the most popular in the industry.
Part of what makes Vanguard so popular is access to its highly rated low-cost funds. Vanguard has many of the best index funds and ETFs on the market, making it an attractive option for investors who want to choose passive investments that can grow in their accounts for years to come.
One caveat with opening a Vanguard Roth IRA is that they have notoriously high minimum investments on their mutual funds. In most cases, you’ll need at least $3,000 to start investing in each mutual fund.
Many people know Ally from their popular high-yield savings accounts, but the company has also become a popular choice for online investing, including its Roth IRA. Ally’s Roth IRA has no minimum investment, no account fees, and no commissions on stocks and ETFs.
One of the most attractive features of Ally Invest is the choice between self-directed trading and a robo-advisor for your Roth IRA. The self-managed option is completely free. You will have access to thousands of investments to build your own portfolio.
The other option that Ally Invest offers for your Roth IRA is its Robo Wallet. With this option, a robo-advisor will choose your ETF investments based on your age and risk tolerance, and rebalance your portfolio as needed. You can start with as little as $100.
One downside worth mentioning is that Ally Invest does not currently offer any commission-free mutual funds. Therefore, the Roth IRA may only be right for you if you know you will be investing in ETFs instead.
How to Open a Roth IRA Account
Even though there are many brokerage firms to start with, the best thing you can do as an investor is to find one you like and stick with it. You don’t want to waste time. Choose one and get moving.
With these online investment companies, opening a Roth IRA can take as little as a few minutes. Here’s how to start:
- Choose one brokerage firm. We’ve shared a few of our favorites above, but there are plenty more. Ideally, you’ll want a discount broker that offers free or low-cost investing and a variety of investment options to help you build a diversified portfolio. Choose one and start as soon as you can.
- Configure your account. When you sign up with your broker, be sure to select Roth IRA as your account type to ensure you get all the tax benefits.
- Fund your account. You’ll be able to connect your Roth IRA to your bank account to set up automatic contributions or transfer money to the account when you can. Averaging, or depositing the same amount of money each month into your retirement account, is a great way to stay on track.
- Choose your investments. Remember that the Roth IRA is the type of account, but it’s not the investment. Once the funds are in your account, you will need to choose investments to put your money into. Low-cost index funds that track the stock market (like the S&P 500) are a great place to start. Make sure your money is invested and not just idle in your account. Call your brokerage firm and make sure your money is invested.
Should You Get a Traditional IRA or a Roth IRA?
A traditional IRA is another type of individual account that can help investors save for retirement in a tax-efficient way. The difference between a Roth IRA and a traditional IRA is when the money is taxed. Unlike a Roth IRA, you contribute pre-tax dollars to a traditional IRA, which reduces your taxable income now. You will pay tax at the time of withdrawal and this amount will depend on your tax rate at that time.
Many investors wonder which is better, a traditional IRA or a Roth. What you’re really asking is whether it’s better to get tax relief now or in retirement. And unfortunately, there is no easy answer. Instead, the right account for you will depend on your income, now and in the future.
Ultimately, the right choice will be different for everyone. Just be sure to choose one and stick to it. You don’t want to miss out on compound earnings and interest on your money because of a few nuances.