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 allows you to save for your future by paying taxes on your contributions now and taking them out tax-free at retirement.
Roth IRAs have become especially popular among young investors. Of those Roth IRA investors, nearly one-third are under the age of 40, and well over half are under the age of 60. “[Roth IRAs are] the crème de la crème of retirement accounts,” Cassandra Cummings, founder of The Stocks & Stilettos Society, tells NextAdvisor. “Everybody has a bank account and a debit card. Everybody should have a Roth IRA.”
If you’ve been considering opening a Roth IRA, we can help. We’ve rounded up our favorite places to open up Roth IRA accounts and spoken with a couple of experts to learn how investors can make the most of their Roth IRAs.
What Is a Roth IRA and How Does It Work?
A Roth IRA — or individual retirement account — is a tax-advantaged investment account designed to help you save for retirement. When you contribute to a Roth IRA, you do so with money that’s already been taxed. Then your investments grow tax-free during your working years, and you can withdraw the funds completely tax-free at 59 ½.
According to Stephanie Genkin, a CFP and financial advisor at My Financial Planner, the tax advantage the Roth IRA offers is what makes it such a popular option with investors.
“Tax-free growth for decades on an investment is very valuable,” Genkin said.
Roth IRAs have strict contribution limits. You can only deposit $6,000 a year if you’re under 50 years old, and $7,000 a year if you’re over 50. Your Modified Adjusted Gross Income (MAGI) must also be under $144,000 for tax year 2022, and under $214,000 if you’re married and filing jointly. If your income is over that, you can still contribute, but must adhere to the rules of a backdoor Roth IRA, which means opening a traditional IRA, investing money and converting it into a Roth IRA.
Best Brokerage Firms to Open a Roth IRA Account
To really grow wealth, you must invest your money because saving alone is not enough. Investing is more accessible nowadays as online brokers allow anyone to invest, often with no fees or minimums. The brokerages below all offer Roth IRAs. Here are our favorite to get started:
Don’t let analysis paralysis stop you from investing for retirement. Whether it’s choosing between a traditional IRA and Roth IRA or choosing the right brokerage firm, you’re better off getting an early start.
Fidelity is one of the most popular online brokerage firms on the market and consistently ranks among the favorites of the experts we speak to. Fidelity offers several different Roth IRA options to choose from. With their most basic plan, you’ll choose all your own investments and won’t be subject to any account fees. You’ll also have access to all of the great features Fidelity has to offer, 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 anywhere else. But Fidelity also has a range of mutual funds and ETFs that charge commission and low expense ratios, or fees (and some charge no fees at all). A good rule of thumb is to look for accounts that charge under .2%. Steer clear from any fees 1% or higher. It’s good to note that a high expense ratio will eat into your investing profits, so be sure to look at what they are.
Schwab is another one of the biggest names in online brokerage firms and its Roth IRA has no account minimums to get started, meaning you can start investing with as little as you’d like. 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 a S&P 500 index fund is a great way to build wealth because your money is spread out among 500 of the top companies in the stock market. This helps keep your money diversified and protected.
Schwab also has plenty of other features that both new and experienced investors will love, like tons of educational resources and in-house investment advice, whenever you need it.
Betterment is a great choice for investors who prefer a hands-off investing 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 love that Betterment is completely automated. Once you answer some key questions about your retirement goals, Betterment completely 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-managed Roth IRA, it does charge management fees, which you’ll pay on top of the 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 pretty reasonable.
Vanguard is one of the first names people think of when it comes to online investing. Its retirement accounts — including its Roth IRA — are some of 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 top 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 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 commission on stocks and ETFs.
One of the more attractive features of Ally Invest is the choice between self-directed trading and a robo-advisor for your Roth IRA. The self-directed option is entirely free to use. You’ll 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 Portfolio. With this option, a robo-advisor will choose your ETF investments based on your age and risk tolerance, and it will rebalance your portfolio as needed. You can get started with as little as $100.
One downside worth mentioning is that Ally Invest doesn’t currently offer any commission-free mutual funds. As a result, this may only be the right Roth IRA for you if you know you’ll be investing in ETFs instead.
How to Open a Roth IRA Account
Even though there are numerous brokerage firms to get started, the best thing you can do as an investor is find one you like and stick with it. You don’t want to waste time. Pick one and get moving.
Thanks to these online investment firms, opening a Roth IRA can take as little as a few minutes. Here’s how to get started:
- Choose a brokerage firm. We 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. Pick one and get started as soon as you can.
- Set up your account. When you sign up with your broker, be sure to select Roth IRA as the account type to ensure you get all of the tax advantages.
- Fund your account. You’ll be able to connect your Roth IRA to your bank account to either set up automatic contributions or transfer money into the account when you’re able to. Dollar-cost averaging, or depositing the same amount of money every 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’ll have to choose investments to put your money in. Low-cost index funds that track the stock market (like the S&P 500) is a great place to start. Make sure your money is being invested and not just sitting idle in your account. Call your brokerage firm and make sure your money is being 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-advantaged 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 and that lowers your taxable income now. You’ll pay taxes on withdrawal and that amount will depend on your tax rate at the time.
Many investors find themselves asking which is better, a traditional or Roth IRA. What you’re really asking is whether it’s better to get a tax break today or during retirement. And unfortunately, there’s no easy answer. Instead, the right account for you will depend on your income, both today and in the future.
Ultimately, the right choice will look different for everyone. Just be sure to pick one and stick with it. You don’t want to miss out on earnings and compound interest on…