Investing Options for Roth IRAs From Acorns

Acorns' Moderate portfolio provides balanced exposure to stock and bond ETFs

Acorns Grow Inc. is a financial technology (fintech) company. It provides a micro-investing platform that helps people save small amounts of money on a regular basis. The company, which was founded in 2012, offers banking services such as a checking account and a debit card. It also provides a limited selection of portfolios comprised of exchange-traded funds (ETFs) that are pre-selected from a list of about 22 ETFs. The company serves more than 9 million customers.

Acorns operates as a discount broker, providing limited investment management services at a discounted price. Its platform is designed to invest its users' spare change from everyday purchases into one of the company's diversified portfolios, each of which is comprised of up to six stock and bond ETFs. The platform's algorithm will recommend one of five core portfolios—Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive—based on a user's risk profile. But users can ignore the recommendation if they want and choose one of the other portfolios available for their Roth IRA or other type of investment account.

Acorns also recently began offering four sustainable portfolios for investors seeking investments that meet environmental, social, and governance (ESG) criteria. The four sustainable portfolios available include: Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive. There is no Conservative option for the sustainable portfolios. Thus, investors wishing to switch to a sustainable portfolio from a core Conservative portfolio will have to assume additional risk.

Investors in the U.S. have access to several tax-advantaged saving plans, including 401(k)s, individual retirement accounts (IRAs), and Roth IRAs. The main difference between a Roth IRA and a traditional IRA is that the former is funded with after-tax dollars. That means that contributions to Roth IRAs are not tax deductible the way they are with traditional IRAs. But unlike a traditional IRA, for which withdrawn funds are taxed, a Roth IRA allows investors to withdraw funds tax-free.

Key Takeaways

  • Acorns, founded in 2012, is a fintech company that provides a platform to regularly invest users' spare change in a portfolio of ETFs.
  • Users are matched with one of five core ETF portfolios based on their risk profile, but they can choose a more or less aggressive portfolio than the one recommended by Acorns.
  • The five core portfolios include: Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive.
  • The Moderate portfolio provides a well-balanced portfolio with a 60/40 stock-to-bond exposure.
  • Acorns also offers four sustainable portfolios for ESG investing.
  • Acorns constructs its portfolios out of ETFs offered by other brokerage firms, and investors can replicate the composition of Acorns' portfolios with accounts at these other firms.

Acorns Core 'Moderate' Portfolio

  • 35%—Vanguard S&P 500 ETF (VOO): Large-Cap Stock ETF
  • 5%—iShares Core S&P Mid-Cap ETF (IJH): Midcap Stock ETF
  • 2%—iShares Core S&P Small-Cap ETF (IJR): Small-Cap Stock ETF
  • 18%—iShares Core MSCI Total International Stock ETF (IXUS): International Stock ETF
  • 12%—iShares Core 1-5 Year USD Bond ETF (ISTB): Short-Term USD Bond ETF
  • 28%—iShares Core U.S. Aggregate Bond ETF (AGG): U.S. Aggregate Bond ETF

Acorns' core Moderate portfolio follows the 60/40 rule: it is composed of 60% stock ETFs and 40% bond ETFs. The 60/40 portfolio has become a standard for asset-allocation strategies, striking a balance between growth and risk. However, there are other allocation rules that are followed across the industry. Some financial advisors recommend following the "100 minus your age" rule. So if an investor is 30 years old, their portfolio would be comprised of 70% stocks and 30% bonds. By the time they turn 40, they would have the 60/40 portfolio. But all of these guidelines are just general rules of thumb. They should only serve as starting points. The important thing is that investors choose an asset mix that reflects their risk tolerance as well as their investment time horizon and associated need for growth.

Acorns offers four other options beyond its Moderate portfolio for investors who want to take on more or less risk. The company's more conservative portfolios provide greater exposure to bonds. The most conservative portfolio available is comprised entirely of bond ETFs. The more aggressive portfolios are tilted more toward stocks, with the most aggressive portfolio comprised entirely of stock ETFs.

Acorns charges $3 per month for a personal account. This subscription fee covers investment, retirement, and checking accounts as well as a debit card, bonus investments, financial advice, and more. However, this amounts to a substantial management fee percentage for smaller accounts. At $36 a year, that amounts to a 0.36% annual management fee for an account with $10,000 in it, multiplying the expense ratio of the ETFs listed above severalfold.

This means that investors who have smaller accounts but like the structure of Acorns' portfolios, may want to build a similar one using another broker, many of which don't charge any annual management fees for basic accounts. Though those investors will need to rebalance their portfolio themselves periodically in order to maintain the target asset allocation, they'll only pay a fraction of the fees.

Does Acorns Offer a Roth IRA?

Yes. Acorns offers a retirement account named Later. This Later account can be either a Roth IRA, a traditional IRA, or a simplified employee pension (SEP) IRA.

Is Acorns Good for a Roth IRA?

Acorns is one option among many brokerage accounts that offer Roth IRAs. However, Acorns only offers a narrow selection of managed portfolios comprised entirely of ETFs. Investors who want more control over their portfolio and who wish to invest in other types of securities, such as individual stocks and bonds, will have to go with another broker.

Can I Move My Roth IRA From Acorns?

Yes. Acorns allows investors to withdraw their money at any time. However, there are tax implications for taking early withdrawals or transfers from a Roth IRA before retirement.

The Bottom Line

A Roth IRA offers investors certain tax advantages. Roth IRAs are unique in that they are funded with after-tax dollars and are not taxed when the funds are withdrawn at a later date. In short, funds invested in a Roth IRA can grow tax-free. After opening a Roth IRA, the types of investments chosen will depend on the individual investor's risk tolerance and the amount of time and energy they have to research various investments. Acorns simplifies the process of determining which investments to include in a portfolio by offering a limited selection of pre-constructed portfolios. Acorns' platform uses an algorithm to recommend the portfolio that best matches an investor's risk profile.

Article Sources

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