If you're interested in saving effectively for your retirement, it's hard to beat a Roth IRA. Among all the providers of Roth IRAs, what's the best one for you, with low fees and rates, and reasonable minimums to open an account? Here's a review of Fidelity Investments, a solid option.
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Open a Roth IRA
First, though, let's review what a Roth IRA is and why you might want to save for retirement with one. There are two main kinds of IRAs -- the traditional IRA and the Roth IRA. With a traditional IRA, you contribute pre-tax money, reducing your taxable income for the year, and thereby reducing your taxes, too. (Taxable income of $70,000 and a $5,000 contribution? Boom -- your taxable income for the year is now $65,000.) The money grows in your account and is taxed at your ordinary income tax rate when you withdraw it in retirement.
With a Roth IRA, you contribute post-tax money that doesn't reduce your taxable income at all in the contribution year. (Taxable income of $70,000 and a $5,000 contribution? Your taxable income remains $70,000 for the year.) What's the point of the Roth, then? This: Your money grows in the account until you withdraw it in retirement -- tax free.
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How much to start?
So how much should you sock away in a Roth IRA? Well, Fidelity requires no minimum investment amount to open an IRA if you have contributions automatically made from your bank account, so you can open and maintain a Roth IRA there with little money. But that would defeat the purpose and the potential of the IRA: helping you accumulate a lot of money for retirement. (That's a really important goal, by the way, since fewer and fewer of us have pensions to look forward to these days.)
When, then, is the maximum you can park in an IRA? Well, IRA contribution limits for both 2016 and 2017 are the same: $5,500. There's also an extra $1,000 "catch-up" contribution permitted for those age 50 or older, letting those folks sock away as much as $6,500 for the year. Here's an idea of what such sums can do: If you invest $5,500 each year in a Roth IRA for 25 years and it grows by an annual average of 8%, you'll end up with more than $430,000! (And in a Roth IRA, it won't even get taxed upon withdrawal.) Contribution limits are increased every year or few years, so aim to keep contributing the maximum to your IRA over time.
Image source: Fidelity Investments.
Fidelity's rates and fees: a review
Now let's take a closer look at Fidelity Investments. In Barron's 2016 survey of brokerages, Fidelity came out on top. Barron's cited Fidelity's "variety of trading and investing tools, and the quality of its trade execution," adding: "The stock-detail display has been updated to provide information as well as insight, including dividend analysis, earnings metrics, and social sentiment. The planning and guidance center has been redesigned and includes a Retirement Readiness score that may spur many investors into action." In categories that were rated, Fidelity did especially well in research amenities, customer service, education, security, and its app.
The folks at NerdWallet.com rate Fidelity highly, too, saying of its research offerings: "Fidelity is simply unmatched here. The company offers research from more than 20 providers, including Recognia, Ned Davis, S&P Capital IQ and McLean Capital Management."
Lower fees can be found, but Fidelity's are still quite low. Trades placed online cost $7.95 It charges no annual or inactivity fee -- though it will expect $50 if you close an account. A particularly appealing aspect of Fidelity as an IRA administrator is that it's a massive mutual fund company, and therefore gives you easy access to invest in gobs of funds. Its funds tend to have significant minimum initial investment amounts, though -- often $2,500. Once you pass that hurdle, there are often no minimums for further investments in the fund in an IRA.
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What's the best investment for your Roth IRA?
So what, exactly, should you invest in, in your Roth IRA? Well, mutual funds are an obvious possibility. Fidelity has many actively managed funds (that is, ones where financial pros are selecting which securities to buy and how long to hold them) with good track records, but even highly regarded funds can underperform. Indeed, according to the folks at Standard & Poor's, as of the end of June 2016, fully 87% of all domestic stock mutual funds underperformed the S&P 1500 Composite Index over the past 10 years. And 85% of large-cap stock funds underperformed the S&P 500. If you want to go the index fund route, Fidelity offers the solid Fidelity 500 Index Fund (NASDAQMUTFUND: FUSEX), with an ultra-low expense ratio (annual fee) of 0.10%.
If you want to invest in individual stocks instead of, or in addition to mutual funds, consider including some that have the most growth potential in your Roth. They won't all pan out, but if you do well and one or a few holdings skyrocket, you'll enjoy all that growth tax-free.
Whether you go with Fidelity or not -- and there are plenty of other very good brokerages -- be sure to consider making the most of a Roth IRA.
