If you don't have access to a 401(k) retirement account through your workplace, the next best thing may be an IRA. Standing for individual retirement account, an IRA is a tax-advantaged account that lets you put money aside for the future. But while opening an IRA can be a smart financial decision, selecting the right provider can feel overwhelming.
Here are five IRA providers to consider:
-- Charles Schwab.
-- TD Ameritrade.
Read on for details on who offers IRAs, how to choose a provider and which firms offer the best IRA accounts.
[See: 7 New Taxes Retirees Face.]
Understanding IRA Accounts
While contributions to a traditional IRA are tax-deductible, withdrawals in retirement are subject to income tax. Another option is to open a Roth IRA, which doesn't offer any immediate deduction but does provide tax-free withdrawals in retirement. Up to $6,000 can be contributed to an IRA in 2020, and those age 50 and older can contribute $7,000.
IRAs are offered by numerous institutions, from national banks like Citi and Chase to investment firms like Fidelity and Charles Schwab. Plus, a new generation of online investment platforms such as Betterment and Wealthfront cater to those who want a hands-off experience for retirement savings. These new platforms are ideal for do-it-yourself investors who don't feel the need to work one-on-one with a broker. Meanwhile, those who want their account actively managed by a professional may be best served by an IRA set up by a brokerage firm.
IRA money held in a bank deposit account such as a savings account or certificate of deposit is typically insured for up to $250,000 by the Federal Deposit Insurance Corporation. Meanwhile, the Securities Investor Protection Corporation offers up to $500,000 of protection to customers of member brokerage firms.
Tips for Finding the Best IRA Account Provider
There are three main factors to consider when selecting an IRA provider: cost, service and investment options.
Some IRAs charge a percentage of the amount invested while others charge a fee per transaction. Per-transaction fees may range from $4.95 to $9.95 for stocks and up to $49.95 for mutual funds. Many companies offer a number of stocks and ETFs that can be traded for free as well. Meanwhile, percentage fees can be as low as 0.25% of an account balance.
When comparing costs, remember that you typically get what you pay for. Low-cost providers offer less personalized service while one-on-one advice from a planner will come at a premium. That isn't to say a low-cost provider isn't a good choice, but it is one that will be best for people who feel confident in their ability to manage their own retirement account.
If you're paying more for personalized advice, understand what motivates a company's recommendations. "Not all IRA providers are fiduciaries," says Corbin Blackwell, a certified financial planner at Betterment. That means they are not legally required to work in your best interest and could try to steer you into investments that result in larger sales commissions. "Non-fiduciary IRA providers may charge you far more in commissions, account charges and hidden fees than you'd pay if you had hired a fiduciary," Blackwell says.
To help people make investment decisions, some IRA providers give customers a variety of tools such as calculators, investment webinars and research reports. However, consumers need to be wise about how they use that information too, says Ken Kamen, author of the upcoming book "Don't Let Technology Crack Your Nest Egg: Rethinking Personal Finance for the Digital Age."
"All those bells and whistles can sometimes take you away from financial success," Kamen says. For instance, they may lead an investor to move money frequently between funds and pay unnecessary fees when it could be better to simply leave money untouched.
In the end, though, no factor is more important to selecting an IRA provider than its investment choices. "More important than where you open (an IRA) is what's inside it," says Michael Foguth, president and founder of retirement planning firm Foguth Financial Group in Brighton, Michigan.
In other words, if an IRA doesn't provide access to high-performing investment funds, a low fee doesn't benefit you. Instead of choosing an IRA provider based on cost alone, consider what funds are available and how they have performed.
Whether you're looking for a higher level of service or lower prices, here's a look at some of the best IRA accounts.
Best IRA Account Providers
Fidelity. Fidelity gets high marks for its broad range of financial products and options and long history of service. Foguth advises, "Look for someone who's been around for a while and knows what they are doing." Fidelity fits the bill there. In addition to IRAs, the company administers 401(k) accounts, brokerage accounts, 529 college savings plans and more. All that has helped Fidelity assemble an impressive collection of financial planning tools that can benefit IRA holders. Plus, Fidelity operates branches across the country for those who want face-to-face service.
There is no minimum balance, opening fee or annual cost to open a traditional or Roth IRA at Fidelity. The company offers access to more than 10,000 mutual funds, including many with no fees. Those that do have fees cost $49.95 to trade online. Customers who use Fidelity's automated phone service for trades are charged $12.95 per trade for stocks and ETFs, and representative assisted trades cost $32.95. U.S. stocks and ETFs can be traded online for free.
Charles Schwab. Charles Schwab also excels at offering customers access to personalized advice. It provides 24/7 professional guidance and a number of online tools and resources. For those who want to meet with an advisor in person, Charles Schwab has a network of storefront locations across the country.
A Schwab IRA can be opened with any amount since there is no minimum balance requirement, and there are no fees to open and maintain the account. Plus, the firm has no-transaction-fee funds that can be traded online or through an automated phone service at no charge. Transaction-fee funds are free to sell and up to $49.95 to buy online or through the phone service. All broker-assisted trades cost an additional $25. Stocks and ETFs can be traded online for no cost or through the automated phone system for $5.
Principal. Principal is another company to consider for IRAs, particularly if you're planning to roll over the balance from a 401(k) account. While it does not have retail locations, it can connect you to a local advisor who can help make the rollover process easy. It also provides access to a team of professionals who help clients draw up an action plan to determine how much money they'll need in retirement and what steps to take to reach that goal.
There are no opening or maintenance fees for accounts with a balance of $10,000 or more. For lower balances, there may be an annual cost of up to $35. Additional fees may be charged for trades within the IRA.
Betterment. If you're comfortable managing your IRA online, try Betterment. The company is a relatively new provider but has quickly made a name for itself as having some of the best IRA accounts for hands-off investors. As a robo advisor, it recommends a portfolio based on financial needs, but doesn't necessarily offer the same level of nuanced guidance you'd receive from a financial planner or full-service investment firm. However, the company is a fiduciary so you can be assured that the recommendations you do receive are made with your best interests in mind.
There is no minimum balance for Betterment's Digital plan, and the plan charges 0.25% of the fund balance as an annual fee. If you have $100,000 to invest, you can open a Premium plan, which charges 0.40% as an annual fee and provides access to certified financial planners. Betterment does not charge trading or transfer fees.
"We typically offer one to 12 months of our service as a free trial, depending on when you sign up, the offer you choose and how much you deposit," Blackwell says. "If you don't like our service, you can always move it to another brokerage or wealth manager at the end of your trial, free of charge."
TD Ameritrade: Foguth often uses TD Ameritrade for his clients' IRAs and says he likes the provider for its strong track record and good customer service. The company also makes it easy to open an IRA online, noting the process can take as little as 15 minutes. For those who want to meet with someone in person to discuss their options, TD Ameritrade maintains more than 275 branch locations.
Stocks and ETFs can be traded online at TD Ameritrade for free. Using the interactive phone system costs $5 per trade, and broker-assisted trades costs $25. The company has hundreds of no-transaction-fee mutual funds available, but no-load options cost $49.99 per transaction.
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