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Updated on Monday, February 24, 2020
You can open a traditional IRA or a Roth IRA from a wide variety of account providers, including banks and credit unions, brokerages and robo-advisors. Taking into account your retirement needs and your investing style will help you decide where to open an IRA. This guide aims to help you determine what kind of IRA is right for your goals and then show you where to open an account.
Should I choose a traditional IRA or a Roth IRA?
Traditional IRAs and Roth IRAs are the two main varieties of individual retirement account. Which one you choose depends on when you’ll need to start taking out money in retirement and certain tax considerations.
With a traditional IRA, contributions you make into the account reduce your taxable income, and money in the account grows tax-free over the years. The withdrawals you make in retirement are treated as taxable income. And required minimum distributions (RMDs) begin at 72 years of age — so whether you need the money or not, you must start taking minimum annual withdrawals from your traditional IRA.
Contributions to a Roth IRA are made after you pay income tax, and contributions do not reduce your taxable income. The money grows tax-free in the account, and withdrawals are free of income taxes in retirement. There are no required minimum distributions with a Roth IRA — you can even choose to leave the funds untouched in the account and bequeath them to your descendants in your will.
- If you anticipate that your taxes are higher when you are making contributions than they will be in retirement, choose a traditional IRA. The money is pre-tax, and contributions help reduce your income taxes. Typically people in higher tax brackets should consider a traditional IRA, to reap the benefits of the tax deduction.
- If you anticipate that your taxes are lower when you are making contributions than they will be in retirement, choose a Roth IRA: Pay lower taxes on the money you contribute now, and skip the higher anticipated taxes in retirement. Typically younger people should consider a Roth IRA when their income tax bracket is lower.
Where should I open an IRA?
Deciding where to open an IRA depends on whether you are a hands-on investor or a hands-off investor.
- Hands-on investors understand markets, know what assets to include in their portfolios and have the skills needed to manage their portfolios over the long term. Time and patience are needed to be a hands-on investor.
- Hands-off investors may be relatively new to markets or may not have enough experience to be comfortable managing portfolios themselves. Alternatively, a hands-off investor may not have the time necessary to personally manage investments.
IRA providers for hands-off investors
If you’re a hands-off investor, a good option would be to open an IRA with a robo-advisor. These low-cost, automated investing platforms assess your risk tolerance, determine your expected retirement age and ask other questions about your expectations. Your answers help the robo-advisor build a portfolio of investments tailored to your needs and goals — and once your portfolio is set up, the robo-advisor manages it for you. Savers with less investing knowledge and expertise can rely on a robo-advisor as a low-cost way to manage an IRA.
IRA providers for hands-on investors
If you’re a hands-on investor who wants to manage your own retirement funds, you should explore opening an IRA at an online brokerage. These conventional investing platforms let you select the securities and assets that make up your portfolio, which you actively guide through good market conditions and bad. It takes a little more time and effort, but those with skills and patience could yield higher returns.
What should I look for in an IRA provider?
As you go through the process of evaluating IRA providers, ask yourself these questions:
Are you a conservative investor, or are you comfortable with more risk?
Very conservative investors should check out banks and credit unions, which offer IRA savings accounts and IRA CDs. These deposit accounts are ultra-safe but low-yield investments that receive Federal Deposit Insurance Corp. (FDIC) coverage. If you are comfortable with more risk and want higher yields from your IRA, choose a brokerage account. Brokers offer a variety of market-traded assets, like stocks and ETFs. If you have a moderate risk appetite, you can open an IRA with a broker and choose fixed-income investments.
How much money do you have to invest?
Not all IRA providers have the same minimum investment thresholds. Robo-advisor Wealthfront has a $500 minimum balance requirement to open an account, while competitor Betterment has no minimum balance requirement. Some Vanguard funds require a minimum investment of $3,000. Personal Capital has a minimum investment threshold of $100,000.
How much do IRA providers charge in fees?
Wealthfront and Betterment charge a percentage of the total amount in your account as their annual management fee. Other platforms, like Blooom, charge a flat annual management fee. With a flat fee, the fee is a bigger percentage of your total portfolio at the outset, when there’s less money in your account, and then it becomes a smaller percentage of the total portfolio as your investment amount grows.
With a fee based on the percentage of assets you have invested, the amount you are paying in fees grows in lockstep with your balance. If you open an IRA with a broker, you could end up paying little to nothing in fees, as many offer fee-free or very-low-fee mutual funds and ETFs — although you’ll need to screen your investment choices yourself.
What assets do you want to invest in?
This comes down to what type of investor you are. Higher-risk securities include stocks and ETFs, while lower-risk choices include bonds and bond ETFs. Meanwhile, bank IRAs are virtually risk-free. Depending on your age and how much risk you’re willing to take, you may end up having a mix of many different types of securities. To be safe, diversify your portfolio and manage your asset allocation accordingly. See which companies offer you the best mix you’re looking for and which ones line up with your values and financial goals.
How to open an IRA
Nearly all IRA providers offer both traditional IRAs and Roth IRAs. Visit the website of your IRA provider of choice or download their mobile app, and complete the registration process.
With a broker, you will be asked to customize your own portfolio, although most brokers provide educational resources to help you choose. Younger investors usually choose riskier securities like stocks. The closer you are to retirement, the less risk you should take on, so choose more fixed-income assets.
How to fund your IRA
Although some companies require an account minimum upon opening, you’ll need to make regular contributions to see your IRA grow. You have the opportunity to fund your IRA a few different ways, including:
- Paycheck deductions: You can set up automatic paycheck deductions to fund your IRA of choice. Talk to your employer to see whether they make this option available.
- Monthly payments: If your employer doesn’t offer automatic payroll deductions, you can make regular monthly IRA contributions. Either handle the contributions manually as part of your monthly budget process or set up automatic payments from your bank account.
- Rollover retirement plan: If you’ve recently switched jobs, you might have a 401(k) with your old employer. You can roll that over into an IRA. An IRA rollover requires several steps, depending on your old 401(k) and your new provider. If you have an old IRA, you can move that over as well. While you’re allowed to have multiple IRAs, your $6,000 contribution limit is for all of them — not just each one you have.
You can also have a mix of ways to contribute to your IRA. For instance, if you get a bonus at work and want to put it toward your IRA, you can make a one-time contribution on top of your regular payouts.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.