Roth IRAs and traditional IRAs are very similar, but they differ in how they are taxed. With a traditional IRA, contributions will be taxed upon the withdrawal of funds from the account. With a Roth IRA, you pay taxes on the contributions you place in the account and you do not pay a tax once you withdraw the money at the age 59½ or older. If you withdraw before the age of 59½ with either a traditional or Roth IRA, you are subject to an additional 10% tax for early withdrawals unless you qualify for an exception.
Both Roth IRAs and traditional IRAs provide tax-free growth of your contributions until you retire, which is why finding the right online broker to build your retirement wealth is crucial. The brokers and robo-advisors we selected have excellent retirement planning and reporting tools. We also looked at low or no annual fees for managing your IRA, so you can keep that money growing for your retirement.
The following are our noteworthy Roth IRA accounts for October 2020:
- Fidelity Investments
- Charles Schwab
- Merrill Edge
- M1 Finance
- Account Minimum: $0
- Fees: $0 for stock/ETF trades, $0 plus $0.65/contract for options trade
Fidelity is improving its retirement planning tools intended to engage millennials with a game called Five Money Musts, which encourages new investors to get into the markets using exchange-traded funds.
For those who are further down the road toward retirement, there are tools to help get organized as one’s retirement date approaches, including a clear explanation of how and when to take Social Security payments. Fidelity offers everything from managed accounts to self-service, and its robo-advisory, Fidelity Go, can be used for IRAs.
Rolling an employer’s 401(k) balance into an IRA is a process that can be cumbersome and full of twisty passages, but Fidelity spells out the necessary steps clearly. Its retirement calculators and goal-setting tools are written in plain English and are easy to use.
Low transaction fees, plus terrific order-routing technology that lowers the cost of a transaction by seeking out price improvement.
Abundant online help, including a chatbot that can answer most customer queries.
A wide range of assets can be traded. With commission cuts, all ETFs trade for free.
The platform suffered some outages during heavy trading days, but Fidelity has been investing heavily in the infrastructure to keep this from happening in the future.
Automatic dividend reinvestment is set for the entire account; to change it for a particular security, you must call customer service.
Finding a particular tool or feature can be difficult due to the platform's menu system.
- Account Minimum: $0
- Fees: Free stock, ETF trading, $0.65 per options contract
Schwab offers a wide range of assets in which to invest, and excellent options trading tools. Its Retirement and Planning section of the web platform helps customers understand the types of accounts available, including how to roll over an old 401(k) to an IRA. You can go it alone or sign on with a professional advisor to guide you on your journey.
Schwab’s robo-advisory, Intelligent Portfolios, can be used with any kind of IRA, if you’d prefer to use its no-fee automated service. As retirement nears, Schwab’s site is full of ways to generate income safely up to your target date and beyond. The Retirement Income Quiz is worth taking just to see which areas of financial freedom you might want to study further.
No-cost robo-advisory, Schwab Intelligent Portfolios, is a good place to start investing for retirement.
All ETFs can be traded without incurring transaction fees.
ETF research center also has a screener for closed-end funds, which can be used to generate income in retirement.
Certain mutual funds incur a $76 fee when purchasing.
There is no report spelling out expected income.
- Account Minimums: $0
- Fees: $0 per stock trade. Options trades $0 per leg plus $0.65 per contract
Merrill Edge’s educational offerings are based on investing experience, life stage, life events, and retirement, guiding clients with articles, videos and webinars, and online courses. Almost all of the tools available take a long-term look ahead with a huge focus on retirement planning, so having an IRA here makes a lot of sense.
Merrill’s Portfolio Story feature is a terrific tool for retirement planning and investing for goals. It’s personalized to each customer and displays your asset allocation and your progress towards your goal in an inviting layout. You can drill down for more information about a particular holding using Merrill’s Stock Story feature, which also provides details on a company’s environmental, social and governance (ESG) ratings. A hypothetical trade calculator projects how a trade could impact your entire portfolio.
Merrill has made a huge investment in its mobile apps, reflecting the number of customers who access its services using smartphones and tablets. The mobile apps also include a wealth of guidance and retirement planning content.
Personalized portfolio analysis.
Top notch retirement planning and life stage planning tools.
Customizable news feed with content from more than 35 providers.
Complex options trading is limited.
Self-directed investors may get annoyed by the seemingly constant push towards hiring a financial advisor.
- Account Minimum: $500
- Fees: 0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans
Wealthfront allows you to open traditional IRAs, Roth IRAs, SEP IRAs, and 401(k) rollovers along with a variety of taxable accounts. Goal planning and tracking are where Wealthfront shines. Your dashboard shows all of your assets and liabilities, giving you a quick visual check-in on the likelihood of attaining your goals. As you make life changes, such as a new job, a spouse, having or adopting a child, or buying a house, your Wealthfront plans adjust accordingly.
Wealthfront’s use of third-party data makes it incredibly useful for all sorts of planning—not just retirement—and you may find yourself running scenarios far beyond your long-term investment needs. You can even figure out how long you can take a sabbatical from work and travel, while still making your other goals work.
Wealthfont appears to be making a strong move to integrate all of its money services in a single platform with its Self-Driving Money concept, where you deposit your pay into the platform and it handles your finances for you. This service isn’t up and running yet, but it is a primary focus for the company as part of the next major launch. As a step in this direction, Wealthfront launched a Roth IRA converter that automates the process of moving funds from a traditional IRA into a Roth IRA account.
Wealthfront provides terrific financial planning that helps you see the big picture.
The robo-advisor’s goal-setting assistance goes in-depth for large goals, such as home purchases and college savings.
If you have multiple goals in addition to retirement, Wealthfront’s Path tool shows you the trade-offs you’ll face prioritizing one over the other.
Wealthfront offers no online chat for customers or prospective customers.
Portfolios under $100,000 are not customizable beyond risk settings.
Larger retirement accounts with Wealthfront may contain more expensive mutual funds as an additional type of diversification.
- Account Minimum: $100 ($500 minimum for retirement accounts)
- Fee: 0%
M1 Finance offers a unique combination of automated investing with a high level of customization, allowing clients to create a portfolio tailored to their exact specifications. You can create portfolios containing low-cost ETFs or use individual stocks—or both. M1’s target customer has a long-term focus and experience with using a traditional online brokerage to invest in stocks and ETFs.
M1 is offering these potential clients a lower-cost alternative that allows fractional share transactions and a large amount of control over the portfolio contents. This is the key difference between M1 and many other offerings, as you often are giving up much of the control in exchange for the portfolio management services.
With M1, you can choose one of more than 80 expert portfolios or build your own. You can also build pies—M1’s name for the circular charts showing asset mixes in a portfolio—made out of other pies and keep them all balanced to your specifications. Overall, M1 is offering a remarkably flexible platform that includes stock and ETF screeners to help with investment selection. This type of tool and the approach behind it are still rare in the robo-advisory world.
M1 doesn’t brand itself as an advisory service; rather, it is an automated investing platform designed to take care of the ongoing management of the portfolio you create. This is a do-it-yourself investing platform, and it expects you to know what you are doing and why. As such, M1 doesn’t have many tools for setting goals beyond several dozen articles about retirement savings. This may be jarring to investors expecting more hand-holding, but intermediate investors may welcome the lack of distractions standing in the way of actual portfolio creation. Its offerings have resonated with many investors though—in February 2020, M1 announced that it had crossed the $1 billion threshold of assets under management.
M1 allows you to trade fractional shares so you are fully invested.
M1 charges zero trading fees or asset management fees.
There are a variety of ways to go about portfolio building, including more than 80 "expert" portfolios you can follow for the purpose of mimicking.
The way M1 places trades puts transaction timing out of your control. This will be an issue if you are taking a trading approach to your IRA.
Accounts with less than $20 and no trading activity for 90 days are charged a fee.
M1 does not employ financial advisors and offers very little help for setting financial goals. You also cannot consolidate external accounts for planning purposes.
- Account Minimum: $10
- Fees: 0.25% (annual) for digital plan, 0.40% (annual) for the premium plan
There are several ways to use Betterment: you can sync all of your financial accounts to get an overall picture of your assets without investing, you can invest in one of their portfolios, or you can create a Flexible Portfolio with some of your own specifications. Portfolios are rebalanced when necessary rather than on a set schedule.
Betterment is very much a goal-based platform, and there are many planning tools available to users along with plenty of advice. You can attach a specific investing goal to each portfolio, which can be invested in different strategies. Funds for longer-term goals like saving for retirement can be allocated to one of the higher-risk portfolios, while shorter-term goals, such as funding a down payment on a house, can be allocated to the lower-risk ones.
Betterment has very easy-to-follow steps for setting a goal, and each one can be monitored separately. The asset allocation is displayed in a ring, with equities in shades of green and fixed income in shades of blue. If you’re falling behind on meeting your retirement goals, Betterment will encourage you to put more aside. This can be a helpful prompt, particularly for young investors who may not yet feel the urgency to save for their retirement.
Betterment’s IRA account set up is quick and easy, and portfolios are fully transparent prior to funding.
You can sync external retirement accounts to your Betterment retirement goal to view your overall progress with ease.
Betterment makes it easy to change portfolio risk or switch to a different type of portfolio.
Users of the planning function are constantly nudged to fund a Betterment account.
The standard plan incurs a charge of $199–$299 to talk to a financial planner.
Why You Should Consider a Roth IRA
Roth IRAs are fantastic investment vehicles. This is because they are heavily advantaged against taxes. Here are some reasons that a Roth IRA can be a great opportunity:
Pay taxes on your contributions now and not when you withdraw your money. This also means that not only do the earnings your account makes grow tax-free while they're in the account—you will not be hit with capital gains tax—but that when you withdraw money from your account at retirement, you will pay zero taxes on it. If you believe you'll be in a higher tax bracket when you retire then this is a huge advantage.
No Required Minimum Distributions (RMD)s
There is no age at which you are forced to withdraw money due to RMDs. This means that you can leave the entire account to a child or grandchild, providing years of tax-free distributions.
Ability to Withdraw Contributions
With your taxes already paid, you can withdraw your contributions at any time, both tax and penalty-free. Contributions refer to the money that you put in and not investment earnings on those contributions. It also lets you use your Roth as a backup emergency fund, should you need it.
Tax Diversification in Retirement
When you begin to withdraw from retirement accounts, such as your 401(k) and traditional IRA, your taxable income will rise. This could cause your tax bracket to rise as well. But because the money in the Roth account is not taxable income, it lets you shuffle distributions so that you do not push yourself into a higher tax bracket. This is especially useful in the years before you hit 70½ when RMDs kick in.
Who Are Roth IRAs Best For?
Roth IRAs are best for those whose modified adjusted gross income (MAGI) is under the limit for 2020 ($124,000 if single and $196,000 if married), and for those who believe that they will be in a higher tax bracket when they retire than they are now.
Regardless, it's always beneficial to have your retirement savings tax-diversified. Note that singles with MAGIs between $124,000 and $139,000 ($196,000 and $206,000 for those married filing jointly) can make reduced contributions to a Roth IRA.
Tax diversification means having a variety of retirement accounts with the goal of maximizing withdrawals without pushing yourself into a higher tax bracket.
Here's how it works. When you can withdraw penalty-free money from your retirement accounts starting at age 59½, you withdraw from your traditional IRA savings just up to the limit of the next tax bracket.
You can then take additional savings out of your Roth IRA, as it does not add to your taxable income because it was already taxed when it was first contributed. This lets you keep your taxable income low while being able to take a larger sum out of your retirement accounts.
How Do You Qualify for a Roth IRA?
- If single, you must have a modified adjusted gross income under $139,000 to contribute, but contributions are reduced starting at $124,000.
- If married filing jointly, your modified adjusted gross income must be less than $206,000, with phaseout starting at $196,000.
How Much Can I Contribute to a Roth IRA?
For 2019 and 2020, you can contribute a maximum of $6,000 ($7,000 if you’re 50 or older by the end of the year) or your taxable compensation for the year, if it's below the permitted number.
How Does a Roth IRA Grow?
A retirement account—whether it is a traditional IRA, Roth IRA, or 401(k)—builds up as you contribute to the account. These accounts also grow over time due to compounding interest. Compounding means that every year your contributions earn interest, your balance increases. The following year, you earn interest on the increased balance. As a result, the total amount of interest earned increases each year, even if you are no longer contributing to your account.
In addition to interest-bearing accounts, retirement money, including funds in your Roth IRA, can be invested in the markets. These funds could be placed into stocks, ETFs, mutual funds, and a number of other financial assets. When these assets go up in value, they can significantly grow the value of your retirement account.
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