Working adults have a range of tax-sheltered retirement investing options.
Many can access employer-sponsored retirement accounts, such as SIMPLE IRAs (savings incentive match plan for employees individual retirement accounts), 401(k)s, and 403(b)s. Some savvy investors even use their health savings account as secondary retirement to take advantage of its unique tax benefits.
But the individual retirement account, or IRA, remains a staple of American retirement planning. Unlike employer-sponsored accounts, you fully own and control the account, and it doesn’t change based on your employment.
If you don’t have an IRA yet, there’s no time like the present to learn how they can benefit you.
IRAs 101: A Crash Course
You open your IRA through an investment broker, and the account works similarly to a brokerage account. With it, you can buy and sell securities like stocks, bonds, exchange-traded funds (ETFs), mutual funds, and even options and futures.
The difference between an IRA and a regular brokerage account lies in the tax advantages — and the age restriction on withdrawing money. You can’t withdraw money from an IRA until age 59 1/2, or the IRS hits you with a 10% penalty plus regular income taxes on the withdrawal.
As for the tax advantages, they depend on whether you open a traditional or Roth IRA. With a traditional IRA, you get to deduct the contributions from your taxable income, so you get an immediate tax break. But you still have to pay income taxes on the withdrawals in retirement.
Roth IRAs work in the exact opposite way. You still pay income taxes this year on the money you contribute, but the money in your Roth IRA grows and compounds tax-free, and you don’t have to pay any taxes on withdrawals in retirement.
You can’t just contribute whatever you want to an IRA, however. The IRS limits how much you can contribute each year. In 2020, you can contribute up to $6,000 ($7,000 if you’re over 50).
Can’t decide between a traditional and Roth IRA? Don’t sweat; you can open and invest in both, and the contribution limit covers the combined total that you contribute to them.
Just beware that over a certain income level, the ability to contribute phases out. For traditional IRAs, single filers lose the ability to contribute between incomes of $65,000 and $75,000 if they also have access to an employer-sponsored retirement plan. Likewise, married couples filing jointly lose the ability between incomes of $104,000 to $124,000 if covered with a work plan. For Roth IRAs, you start losing the ability to contribute at $124,000 ($196,000 for married couples filing jointly), and it disappears entirely at $139,000 in modified adjusted gross income ($206,000 for married couples).
While the IRS generally requires you to have income to contribute to an IRA or Roth IRA, that rule doesn’t apply to nonworking spouses, who can contribute through a spousal IRA.
Best Brokers for IRAs
Not all brokers are created equal. Some offer better selections among investable securities than others. Some charge you a commission for every transaction, while many brokers don’t charge commissions anymore.
And increasingly, some brokers offer excellent robo-advisor services to pick and manage your investments for you.
As you start researching brokers, consider the following as the best in business, although each still comes with its own unique pros and cons.
1. Charles Schwab
Despite offering one of the most comprehensive brokerage services on the market, Charles Schwab doesn’t charge commissions on trades. Equally important, it provides an enormous selection of ETFs and no-load mutual funds, including a variety of index funds with low expense ratios.
While some brokers provide only a manually managed account or a robo-advisor account, Schwab has both. And unlike most robo-advisors, Schwab doesn’t charge a cent for it.
The downside of its robo-advisor service is that it requires a minimum investment of at least $5,000. Not everyone has $5,000 ready to invest, and even those who do may prefer to ease their way into letting a robo-advisor manage their money.
Schwab also offers a human hybrid advisory option, so you don’t have to choose between a human investment advisor and a robo-advisor. Best of all, it charges a flat fee for it, bucking the trend of charging a percentage of your investment portfolio.
2. SoFi Invest
There’s a lot to like about SoFi Invest.
Like Schwab, it charges no commissions. Also like Schwab, it offers both manual and automated robo-advisor options for managing your accounts.
SoFi Invest allows fractional share investing, the ability to buy portions of stock shares rather than increments of one share at a time. That helps if you want to buy shares in a company trading at $800 per share and you only want to invest $50.
It doesn’t require any minimum investment to open an account. And even better, it doesn’t charge for its robo-advisor service. While itself uncommon, SoFi Invest goes even further to give its clients access to human investment advisors, all at no charge.
SoFi Invest doesn’t offer every bell and whistle. It doesn’t offer tax-loss harvesting, and it only has taxable brokerage accounts and IRAs. But it does offer other enticing features, such as cryptocurrency trading.
All in all, SoFi Invest makes an outstanding choice for investors looking to start planning for retirement.
3. Ally Invest
Another stellar option, Ally Invest also dispenses with commissions to allow free trades. Like Schwab and SoFi Invest, it offers both an active trading option and an automated robo-advisor option. And like those other two brokers, it doesn’t charge for either.
Ally doesn’t require a minimum investment for its active trading account. And it requires only $100 as a minimum for its robo-advisor account, making it especially beginner-friendly.
One area in which Ally particularly shines is its active trading platform. It offers excellent research tools and even neat features like probability calculators. Active traders will appreciate its options, futures, and forex (foreign exchange) functionality as well — not that most investors do much day trading in their IRA.
Ally doesn’t offer other account types beyond brokerage and IRAs, unfortunately. Nor does it offer a human hybrid advisory option. Additionally, despite a catalog of over 8,000 mutual funds, it doesn’t offer a single one without a transaction fee.
If you like Ally Invest, opt for ETFs rather than mutual funds to eliminate the fees from your portfolio.
See our review of Ally Invest for more details.
A frontrunner among robo-advisor services, Betterment offers a digital-only robo-advisor and a human hybrid advisory service. But it doesn’t offer a manually managed IRA account option.
Still, Betterment’s robo-advisor service proves outstanding. Accounts come with most of the features investors look for, from tax-loss harvesting to fractional share investing. It offers a socially conscious investing option for investors who want to support specific causes. And Betterment offers more account types than most of its robo-advisor peers, going beyond IRAs and brokerage accounts to service trusts. It also lets you link your employer-sponsored retirement account for automated management.
As for the minimum investment, it depends on whether you opt for its all-automated Betterment digital account or its human hybrid premium account. The former doesn’t impose a minimum requirement. The latter requires a brisk $100,000 just to open an account.
While Betterment keeps its fees on the reasonable side, it doesn’t offer a free option. Betterment’s digital plan costs 0.25% of your portfolio each year, and premium costs 0.40%.
Vanguard popularized the passive investing model, combining the index fund with long-term buy-and-hold investing. It’s a strategy everyone can use with virtually no investing education to maximize returns and minimize risk and fees.
Following in Schwab’s footsteps, it eliminated trading commissions in early 2020. Coupled with an impressive selection of low-cost in-house index funds, Vanguard lets you invest for less.
However, it doesn’t offer a robo-advisor service. At least not yet — it plans to launch one later in 2020. The robo-advisor service will cost 0.15%, a cheap-but-not-free option. Vanguard announced it will require a $3,000 minimum investment to use it.
While Vanguard’s ETF index funds cost almost nothing and come with no minimum purchase requirements, Vanguard does require minimum investments of between $1,000 and $3,000 for many of its mutual funds. That’s too rich for many new investors’ blood.
Massachusetts-based Fidelity excels across the board for active investors.
First, it charges no commissions. But more uniquely, Fidelity offers a range of index funds with no expense ratios: completely fee-free funds. Not even Vanguard, who champions that investing model, can say the same. Fidelity also offers over 3,500 mutual funds with no transaction fees.
Fidelity’s research platform also stands out, incorporating data from 20 third-party suppliers, including Recognia, Ned Davis, Thomson Reuters, and McLean Capital Management.
New investors also appreciate its reliable customer service and educational tools. Fidelity helps you learn how to invest at no cost.
Where Fidelity falls a bit short is its robo-advisor service. It only offers a digital robo-advisor with no human hybrid option. And it charges 0.35% for it — not high by investment advisor standards but higher than the superior Betterment digital advisor and more than free alternatives like SoFi Invest and Schwab.
If you plan to choose and manage your investments yourself, Fidelity is an excellent choice. But if you’d rather automate your investments through a robo-advisor, look elsewhere.
7. TD Ameritrade
One of the first brokers to follow Schwab and stop charging commissions on trades, TD Ameritrade remains an outstanding option for IRAs.
It provides extensive research tools, strong customer service, and a user-friendly mobile app. If you prefer mutual funds to ETFs, it offers over 4,000 of them with no transaction fees.
One particularly fun feature is its PaperMoney virtual investing simulator, where you can invest with fake money to get a sense for the platform and securities investing in general. Its surprising more brokers don’t offer this feature, but few do.
In addition to brokerage accounts and IRAs, TD Ameritrade does offer other account types, like 529 plans, ESAs, and specialty accounts like trusts and business partnership accounts.
Like Fidelity, TD Ameritrade shines more for active investors. Its robo-advisor service fails to live up to its competitors, with no human hybrid advisory option and a midrange advisory fee of 0.30% for its digital-only robo-advisor. It also requires a hefty $5,000 minimum investment, although it drops that to $500 if you set up automated recurring transfers.
On the plus side, TD Ameritrade does offer socially conscious investment options, including in its robo-advisor platform. It also features free tax-loss harvesting in its robo-advisor service.
8. Merrill Edge
Trading platform Merrill Edge joins these other commission-free brokers in offering both active investing and robo-advisory services. Beyond charging no commissions on stocks, bonds, and ETFs, it also offers around 2,700 mutual funds with no transaction fee.
Like Fidelity, Schwab, and TD Ameritrade, Merrill Edge provides excellent online research tools and reliable customer service. But what really sets it apart is its integration with Bank of America, which adds over 2,500 brick-and-mortar locations to provide in-person support.
Bank of America owns Merrill Lynch and has taken great pains to integrate the brokerage arm with its traditional banking. With a single login, you can instantly transfer funds between accounts and review investments. You can also earn perks and rewards through Merrill’s Preferred Rewards program, which could include lower interest rates on auto loans or lower mortgage closing costs.
Unfortunately, its robo-advisor is nothing to write home about. It charges high fees relative to competitors: 0.45% for a digital-only robo-advisor and 0.85% for a human hybrid advisory service. The service, called Merrill Edge Guided Investing, also requires high minimum investments, at $5,000 and $20,000, respectively.
For those high fees and minimum investments, you don’t even get higher-end features like tax-loss harvesting. In short, look elsewhere if you want a robo-advisor, whether all digital or human hybrid.
It works like this: You create an online checking account with Acorns, complete with a debit card. Every time you spend money on the card, it rounds the purchase up and transfers the difference to your robo-advisor account, which then invests it per your profile.
While not free, it’s not expensive either. It charges $3 per month for the service, which more than pays for itself by helping you trick yourself into saving more money.
But don’t expect any active investing options or much selection. Acorns offers a handful of prepackaged asset allocation portfolios. You pick one, and it does everything else.
Acorns works well if you just want to set and forget your savings and retirement investing. Just don’t ask it for any customization or other features.
10. M1 Finance
If you like the concept behind Acorns but want more customization, check out M1 Finance.
It follows a similar model of combining automated savings with automated investing through a robo-advisor. Sadly, it doesn’t offer the same debit card round-up feature or other spending-related savings functionality. But you can set up automated recurring transfers into your robo-advisor account.
And this robo-advisor account offers significantly more flexibility than Acorns. You can choose from over 80 prebuilt portfolios or configure a portfolio yourself. Those portfolios include socially conscious investing options as well.
One particularly attractive feature allows you to buy fractional shares as part of your robo-advisor portfolio. Unlike most robo-advisors, M1 Finance lets you pick individual stocks.
Just don’t count on stellar customer service. It offers no online chat and doesn’t list a phone number on its support page.
Woman-centric firm Ellevest caters specifically to female investors and serves them well, particularly after restructuring its pricing.
Like Betterment, M1 Finance, and Acorns, Ellevest only offers a robo-advisor option with no active investing option. If you want to pick and choose individual investments, look elsewhere.
Ellevest previously charged a percentage-based advisory fee but overhauled its pricing in June 2020 to a tiered monthly membership fee model. Starting at $1 per month, you get access to its robo-advisor service, online banking, savings automation features similar to Acorns, and online learning modules. Ellevest no longer requires a minimum deposit to open an account.
To open an IRA, however, you need to spring for at least their mid-tier membership at $5 per month. Ellevest also provides investment guidance for retirement accounts held elsewhere. It includes advice for employer-sponsored accounts like 401(k)s and SIMPLE IRAs — a nice feature not offered by your garden-variety robo-advisor. And if you want help rolling over those employer-sponsored accounts to your IRA, Ellevest provides expert support to smooth the process.
That level of human support is where Ellevest’s female-oriented approach shines brightest. Beyond basic customer service, it offers access to financial planners for customized advice, and even executive career coaching specifically for women. For women looking to advance their careers, that coaching serves as an enticing perk. However, where once Ellevest included these human support services under their percentage-based advisory fee, Ellevest now charges by the hour for them.
While Ellevest offers regular brokerage and IRA accounts, it doesn’t offer other types of accounts, like college savings accounts. And though Ellevest doesn’t turn men’s business away, it also doesn’t provide any gender-specific advice or services for them.
Tax-sheltered retirement accounts offer an optimized way to slim your tax bill while investing for your golden years. And none are simpler to open and manage than IRAs.
If you’re new to retirement investing or investing in general, open an account with a robo-advisor to choose and manage your investments for you. Many are free, allowing you automated expert management that was exclusive to the wealthy just 10 years ago.
While you’re at it, look into opening a Roth IRA account for your teenager. By getting started that young, you can help your child build lifelong wealth and secure their future — all while showing them basic financial literacy, like how to open and manage a brokerage account.
What are you looking for in a broker for your IRA? Are you willing to pay a fee for premium features, and if so, which ones?