For Americans, Individual Retirement Accounts or IRAs are one of the best ways to save for retirement.
When I finally started to turn my financial life around at age 35, the very first thing I did was to open an IRA. And two years later, it’s a choice I haven’t once regretted.
IRAs have a lot of benefits:
- They are “tax-advantaged” in one of two ways: you can either pay taxes now on the money you put into them (a “Roth IRA”) but then withdraw all contributions and growth tax-free later; or you can reduce your taxable income now but pay taxes on withdrawals later (“Traditional IRA.”)
- In other words, having an IRA helps you plan for your taxes either now or in the future.
- Unlike a 401(k), you do not need your employer to offer or manage this kind of account. You can open one directly (see below) and maintain control over it yourself.
- You can even contribute to an IRA if you’re not employed full-time or if you’re under 18. When my friend earned her first paycheck as a high school student, her mom wouldn’t let her spend it — instead she had to put it into an IRA. Trust me, she’s grateful now!
- You can open an IRA with a very small investment if you commit to monthly automatic contributions — as little as $0!
- They can be lower-fee than 401(k)s — when you’re all set up, you can use a service like FeeX to check on fees you might not know about.
If you are ready to open an IRA, you have many options.
Just like with choosing a bank, you will want to research each company’s service options, fees, account minimums, and procedures.
Some accounts will be great for those who have a big chunk of money to invest, and others for those who need to start with small monthly contributions. Some accounts charge a larger management fee in return for extra services, and some are low-fee and bare-bones.
There are many more options out there, but here are five of the best types of accounts for beginners:
1) Low Management Fees: Vanguard and Fidelity
Vanguard and Scottrade are classic choices that offer some of the lowest management fees out there for their index funds — Vanguard invented that concept, in fact. Both let you purchase a wide selection of funds with no transaction fee once you’ve opened your IRA.
Vanguard does have a $1,000 minimum on some of its funds and a $3,000 minimum on others, while Fidelity mostly requests a $2,500 minimum though it will waive that minimum with auto-deposits of $200 a month. These are both really good options if you are starting off with some money to invest and feel confident that low-cost index funds are right for you.
Betterment and Wealthfront are investment upstarts. Both charge a small annual management fee (currently 0.15%-.035% depending on which service and how much you have to invest) on top of the fund fees — so you will pay more than you will at Vanguard, say, but less than you would with most traditional hands-on financial advisors.
In return, both services will ask you questions about your goals and risk tolerances and recommend a portfolio for you. Each offers other services as well: rebalancing, tax-loss harvesting, and sometimes more personalized advice. Betterment has no account minimum, and Wealthfront has a $500 minimum.
3) Traditional Brokers
If you want to set up your IRA in person and have a financial advisor of your own, you will probably want an account with a traditional broker. Charles Schwab and TD Ameritrade are two well-regarded firms that have physical offices in many parts of the country and 24/7 phone support, as well as strong customer service records.
As of 2016 they each charge slightly under $10 in trade commissions, and offer a variety of low-cost mutual funds. Ameritrade has no account minimum, and Charles Schwab’s $1,000 minimum can be waived if you set up auto-deposits of $100/month.
4) Active Trading
The majority of IRA owners — especially beginners — should not be looking to actively trade themselves. However, if you have more experience you may want to trade yourself with at least some of your IRA portfolio, and in that case a platform like TradeKing is a good choice.
TradeKing has no account minimum and charges $4.95 per trade in commissions. There is also a $50 annual fee if you don’t maintain an account balance of $2,500 or make at least one trade per year — but if you are opening an account there, this is unlikely to be a problem!
Keep in mind that you don’t have to actively trade with an account like TradeKing. You can simply choose low-fee mutual funds and let your investments compound over time.
5) With a CD at a Bank
If you’re concerned about putting all of your retirement funds into the stock and/or bond markets, you might consider keeping some in a Certificate of Deposit.
Discover Bank, among others, lets you open an IRA and buy a CD, which will earn more interest than a traditional savings account while giving you the tax advantage of an IRA. If you’re a little older or more conservative this could be a good option for part, though not all, of your retirement funds.
Where do you have IRA or retirement accounts? Any great options I missed?