Modern fintech provides retirement investors with a lot of options. However, having all of these options can sometimes be a bit intimidating.
While most online brokers provide retirement accounts, choosing the best fit can make a big difference over an investor’s lifetime. Small differences in fees can compound and an investor can save thousands of dollars in fees or commissions.
Why investors need an Individual Retirement Account or IRA
Most people will have retired by the time they enter their 70s, either by choice or because they simply can’t work anymore. However, Social Security likely won’t provide enough income for even a very basic lifestyle. Planning and saving for retirement is a critical thing for employees and business owners alike.
Aside from the all-but-extinct employer-sponsored pension plans, IRAs serve as one of the most solid cornerstones for a comfortable retirement. These investment vehicles let investors save for retirement on a tax-deferred basis. This means that contributions can be tax-deductible and investment growth won’t be taxed until the investor distributes funds.
Due to compound interest, the best time to start investing is now. Younger investors can use this time and compounding returns to accumulate substantial retirement savings. These funds will provide financial security during life’s golden years.
While stock market investments are subject to occasional headwinds, average returns are greater than those of a normal savings account. Over the past 90 years, the S&P 500 has returned on average 8-10%. There are several different types of IRAs, but the most well known are traditional and Roth IRAs. Both have tax advantages, but there are some key differences.
A traditional IRA reduces the investor’s current tax burden by allowing pre-tax dollars to fund the account. The money is taxed upon withdrawal at ordinary tax rates in retirement. The logic is that most retirees will be in lower tax-brackets when withdrawing than they were when working.
With a Roth IRA, investors invest after-tax contributions so that they can benefit from tax-free earnings. Roth IRAs have more flexibility since investors can access their contributions or basis and won’t have to take RMDs. RMDs or Required Minimum Distributions, are distributions that investors older than 72 must take annually. RMDs are one of the government’s ways of collecting tax revenue.
Although other factors exist, the decision to use an IRA or Roth IRA comes down to whether or not the investor assumes he or she will earn more while working or in retirement.
When investors need IRAs
As soon as possible! When it comes to investing, starting earlier is better. Investing small amounts monthly, shortly after entering the workforce maximizes the benefits of compound interest. The interest earned and reinvested will also earn interest, causing retirement accounts to grow even quicker.
How to choose an IRA custodian
First off, what is a custodian? In this case, the custodian is a financial institution holding invested retirement funds and ensuring that all governmental and tax regulations are followed. They also educate investors on IRA tax benefits and contribution limits.
Most online investment brokerages also offer services as IRA custodians. Although similar, each specializes in certain types of investment and provides a different level of service on IRAs. Like selecting a stockbroker, choosing the best IRA providers means aligning the available services with the investor’s goals and preferences. While most charge no annual account fees, commissions and trading fees can vary according to the types of assets purchased.
Schwab
Charles Schwab is a trusted name in investment circles. The 50 years of company history, 12 million client accounts, and nearly $4 Trillion in client assets speak for itself.
In 2019, JD Power ranked Schwab #1 for investor satisfaction for DIY investors and third best for self-directed investors who need some guidance.
Offerings
Schwab offers a great selection of retirement investing possibilities, including the best IRA accounts for various investors. Traditional, Roth, Rollover, SEP, and SIMPLE IRAs are available for small business employees and owners.
Although retirement investors tend to stick to simpler investments like stocks, bonds, and funds, Schwab investors can also trade futures.
Charles Schwab excels at customer service. All clients have access to 24/7 support. Schwab’s qualified professionals can also help with paperwork and transferring assets when opening a new account.
Schwab’s Intelligent Portfolio is a Robo-advisor service that’s similar to Betterment and it’s offered to clients with a minimum account balance of $5,000. The management fees vary between 0.05% and 0.18%, depending on the investor’s desired risk level.
Fees
Schwab charges no account opening or maintenance fees and requires no minimum balance. SEP and SIMPLE IRAs also have no minimum deposit. However, broker-assisted trades do cost $25.
Additionally, there is no minimum investment required to invest in various Schwab funds (index, mutual, exchange-traded funds (ETFs), monthly income & market track). Although OneSource mutual funds charge no commission, there is a $49.95 fee when sold if they’re held for less than 90 days.
Pros
- Investment screeners and research tools are helpful and easy to use. Schwab offers a wide selection of retirement and financial planning calculators.
- Customers have access to 24/7 phone support, live chat, and email. Clients preferring in-person consultations have access to 300 local branches with financial advisors including those with the certified financial planner designation.
Cons
- Investors interested in Schwab’s Intelligent Portfolio can’t get financial advice from a human unless they pay for premium service.
- Sweep-cash (uninvested cash in investment accounts) earns less than 0.5%, well below the market average. Investors should be certain that all funds are invested, and not sitting in cash.
- Non-commission-free mutual funds are expensive and cost up to $49.95.
See the full review of Charles Schwab here.
E*Trade
E*Trade is one of the most popular online brokers and has been around since 1981. Morgan Stanley acquired E*Trade. The deal was finalized in October 2020.
Offerings
Retirement investors choosing E*Trade can open traditional and Roth IRAs, as well as SEP and SIMPLE IRAs.
Investor education is a strong suit at E*Trade. For retirement investors, there are planning calculators and educational materials to help investors maximize gains and minimize risks.
IRA investors at E*Trade also have access to Core Portfolios, its Robo-advisor service. The service designs a portfolio based on an investor’s timeline and risk tolerance.
Fees
E*Trade investors can trade US-based stocks and ETFs commission-free. In addition to over 4,400 no-transaction-fee mutual funds, options have no base commission and cost $0.65 per contract. Investors looking to balance their portfolios can also purchase treasury bonds commission-free.
IRAs have no annual fees. Clients requiring paper statements will have to pay $2 if holding less than $20,000 in assets. Broker assisted trades cost $25 each.
Investors looking to make early withdrawals (before age 59.5) will also pay a $25 fee each time, even if the IRS considers the withdrawal penalty-free.
Pros
- E*Trade has 30 local branch offices, which are staffed by financial consultants ready to help investors preferring face to face interaction.
- Automate investing with Core Portfolios.
Cons
- E*Trade’s website isn’t easy to navigate. It can be difficult to determine the required account minimums and the account closure process.
- At 0.3% per year, the Core Portfolios fee isn’t among the lowest on the market. The Robo-advisor also doesn’t offer any access to human financial consultants.
Vanguard
The Vanguard Group is a household name for investors. The company boasts nearly 50 years of experience and is essentially the inventor of the low-cost index fund and investing with low fees.
Offerings
Retirement investors here can select the type of IRA which suits them best. Vanguard offers traditional and Roth IRAs, as well as SEP and SIMPLE IRAs.
While Vanguard’s focus is clearly on low-cost ETFs and mutual funds, investors can also trade other investment options like stocks and bonds. However, this focus on low-cost funds makes Vanguard perfect for long-term buy and hold retirement investors.
At 0.1%, their index funds boast the lowest average expense ratio of the industry. This means investors can profit from market gains to grow retirement funds faster.
Investors planning to take a hands-off approach should consider selecting one of Vanguard’s target-date retirement funds. These target-date funds offer clients a broadly diversified portfolio and automatic portfolio rebalancing. Additionally, socially conscious investors can also choose from Vanguard’s two mutual funds and ETFs focused on sustainable sectors.
The company offers a reasonable amount of research and educational tools, largely focused on helping investors plan for retirement.
Fees
With Vanguard, investors pay no commissions to trade US-Based stocks and ETFs. Clients can also choose from nearly 3,200 no-transaction-fee mutual funds.
Although options are riskier, some investors may choose to include them as part of a balanced portfolio. At Vanguard, options cost $1.00 per contract but have no base commission. Mutual funds require a minimum investment of $1000.
As with most brokers, there are no minimum balances and no setup or annual fees.
Managed portfolios are available for 0.3% of assets under management or AUM.
Pros
- Vanguard specializes in low-cost ETFs and mutual funds, which is perfect for retirement investors.
- Clients have access to investment advisors and many great retirement planning tools.
Cons
- Many features could be out of reach for beginning investors. Although Vanguard requires no minimum balance, some features do require higher balances. Their Robo-advisor and many of Vanguard’s actively managed funds require a minimum investment of $50,000. Admiral Shares, Vanguard’s ultra-low-cost ETFs, requires a minimum investment of $3k.
- While likely not an issue for retirement or novice investors, the trading platform is basic and lacks many of the analytical tools offered by other brokers.
- Vanguard’s focus is clearly on ETFs and mutual funds. Clients planning to trade actively inside of their IRAs might feel more at home elsewhere.
TD Ameritrade
TD Ameritrade is a reputable online broker offering a good selection of tradable securities and IRA options. In November 2019, Charles Schwab announced that they’d acquire TD Ameritrade’s online brokerage.
Offerings
Retirement investors can open a traditional or Roth IRA and get started in as little as 15 minutes.
Ameritrade’s selection of assets is more than sufficient for most retirement investors. In addition to stocks, options, ETFs, and mutual funds; clients can also look into bonds, CDs, or annuities.
Beginner and experienced investors alike will appreciate the great selection of educational resources available at Ameritrade. Investors can easily learn about the basics of retirement planning or how specific securities work.
Fees
Clients can trade US ETFs and stocks commission-free. In addition, there are also over 4,100 no-transaction-fee mutual funds available.
Investors looking to diversify their portfolio with options will pay $0.65 per contract and no base commission.
TD Ameritrade charges no setup or maintenance fees, no annual fees, no inactivity fees.
Pros
- TD Ameritrade’s website offers great research and education options for all levels of investors. On top of 24/7 phone and email support, investors can visit any of their 360 physical branches for face-to-face assistance.
- Free DRIP (Dividend Reinvestment Plan) allows any dividends to be automatically reinvested.
- Account opening is easy and quick.
Cons
- Investors needing assistance with trades will be charged a rather high $44.99 per broker-assisted trade.
- Two mobile and two trading platforms can be difficult to follow.
- Complete beginners might struggle to understand the trading platforms.
See the full review of TD Ameritrade here.
Ally Invest
In 2016, Ally Financial purchased TradeKing, and Ally Invest was born. Although not a household name, they are one of the country’s ten largest brokerage firms.
Offerings
The online broker offers investors access to all IRA types, including SEP and SIMPLE IRAs. like other competitors, investors can open different accounts like a standard brokerage account.
IRA investors taking a hands-off approach to managing their portfolio can use Ally’s free managed portfolio option with a minimum $100 investment. Based on the client’s needs, Ally creates a portfolio designed to fit the desired risk and return levels, which is like Wealthfront, a large Robo-advisor.
New clients can get a cash bonus of up to $3,500, depending on the amount of the initial deposit. Additionally, Ally will credit investors transferring an account from another brokerage for transfer fees of up to $150.
Fees
Ally Invest offers commission-free ETFs and US-based stocks. IRA investors can make up to Level 3 options trades, which have no base commission and cost $0.50 per contract.
Unfortunately, Ally Invest offers no transaction-fee-free mutual funds. Fees start at $9.95 for several no-load funds.
Like most discount brokers, Ally charges no annual or startup fees and requires no minimum balance.
Pros
- Ally offers customer support 7 days a week 7 am-10 pm.
- IRA investors can participate in dividend reinvestment plans (DRIP) for free.
- Ally offers a robust set of tools to help investors get the most out of trading, including some managed portfolio options.
Cons
- Ally offers no-transaction-fee free mutual funds. Retirement investors mainly looking to invest in mutual funds should look elsewhere.
- Clients requiring face-to-face service won’t feel as well served here, as Ally has no branch offices.
Fidelity
Fidelity is a trusted brokerage service that’s been around since 1946. With around $2.5 Trillion in assets under management, it’s currently the fourth largest broker in the US.
Offerings
As well as offering the standard types of IRAs for employees and small businesses, Fidelity also offers Roth IRA accounts for children.
Of course, IRA clients can design their own portfolios. But, here they also have access to Fidelity Go, Fidelity’s Robo-advisor option. This option requires only a $10 minimum investment and allows investors to adjust asset allocation manually.
The automated portfolio is made up of Fidelity Flex mutual funds. Some of these funds are actively managed and attempt to provide higher returns than the market. However, the Robo-advisor does charge a 0.35% annual fee which is automatically withdrawn every quarter.
Fidelity clients have access to a wide range of free research options and investor education. These will teach them about concepts like contribution limits and income tax consequences of IRA strategies. Although the selection is large, Fidelity offers quizzes to help investors determine which provider is best for his or her investment style.
Fees
Like most modern online brokers, Fidelity offers commission-free trading of US-Based ETFs and stocks. There are also over 3,500 no-transaction-fee mutual funds available.
Options have no base commission and cost $0.65 per contract.
Fidelity charges no account fees and requires no minimum investment to open an account.
Pros
- Fidelity offers great support 24/7 by phone, email & live chat. There are also 197 local branches offering investors in-person assistance.
- All cash is automatically directed into its Fidelity Government Market Fund (SPAXX). This fund offers a higher interest rate than a traditional, FDIC insured savings account.
- Large amounts of free research options and retirement planning tools.
Cons
- Investors requiring broker-assisted trades will pay a $32.95 fee.
- Fidelity’s Robo-advisor charges 0.35% of assets annually, which is on the high side.
- At $49.99, commissions are high for mutual funds that aren’t in the no-fee category.
See the full review of Fidelity here.
Bottom line
Deciding to start investing for retirement means choosing to prepare for the future. A properly funded IRA can serve as the backbone of a smart investor’s retirement strategy.
Modern fintech gives investors great access to a plethora of low-cost and easy to use online brokerages. Most brokerages no longer charge annual fees, which makes it more critical to consider total costs for the investor’s preferred asset class.
When choosing an IRA custodian, matching investment style with the broker is the most important criteria. Some brokers specialize in managed portfolios with others in certain types of asset classes.
