A Roth IRA is a type of tax-advantaged retirement account. It allows qualified individuals to contribute money, invest it on a tax-deferred basis, and eventually withdraw it tax-free.

What's the difference between a Roth IRA and a traditional IRA?

A traditional IRA provides an immediate tax benefit: Qualified contributions are deductible on the individual's current-year tax return. However, withdrawals from a traditional IRA will be considered taxable income. Roth IRA contributions are not tax-deductible, but qualified withdrawals will be completely tax-free.

Best Roth IRA Accounts of September 2020

By: Matt Frankel, CFP | Sept. 14, 2020

Sept. 14, 2020

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We've looked at dozens of popular brokers to find the best Roth IRA accounts. Below, you'll find our current favorites. If you are looking for the best IRA accounts, it's important to understand what a Roth IRA is and whether it is a good option for you. We'll go over each of these points here so you can choose the best Roth IRA for you.

The Ascent's picks of the best Roth IRA accounts:

Index funds: Vanguard
Research: TD Ameritrade
Retirement investors: Charles Schwab
Low fees: Ally Invest
Mobile platform: E*TRADE
Customer support: Merrill Edge® Self-Directed
Investors: Fidelity

Show The List [+] Hide The List [-]

Ratings Methodology

Vanguard

Our Rating:

Rating image, 4.5 out of 5 stars.

4.5 stars

Bottom Line

Vanguard gets dinged slightly in our model for having high-ish account minimums for some of its services and an often-pricey fee structure for individual stocks, but it remains the gold standard for index funds and ETFs.

Read Full Review

Fees:

$0 per trade

Account Minimum:

Read Full Review

Best overall

TD Ameritrade

Open Account

Our Rating:

Rating image, 5.0 out of 5 stars.

5.0 stars

Bottom Line

TDA is one of our few 5-star all-around brokers, and it keeps that top rating for IRAs with its large amount of commission-free ETFs and mutual funds, along with strong sign-up promotions.

Read Full Review

Fees:

$0 per trade

Account Minimum:

Special Offer

Don’t wait. Open and fund an IRA today with TD Ameritrade and get up to $600. Learn more.

Open Account

On TD Ameritrade's Secure Website.

Charles Schwab

Our Rating:

Rating image, 4.5 out of 5 stars.

4.5 stars

Bottom Line

Schwab sports hundreds of no-commission ETFs and the largest amount of no-transaction-fee mutual funds of any broker we evaluated, and individual stock trades are now $0. One improvement would be better sign-up promotions.

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Fees:

$0 per trade

Account Minimum:

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Ally Invest

Our Rating:

Rating image, 4.5 out of 5 stars.

4.5 stars

Bottom Line

Low fees, no account minimums, and over 100 commission free ETFs make Ally an attractive place to park your IRA funds, though it doesn’t offer any no-transaction fee mutual funds.

Read Full Review

Fees:

$0 per trade

Account Minimum:

Read Full Review

E*TRADE

Open Account

Our Rating:

Rating image, 4.5 out of 5 stars.

4.5 stars

Bottom Line

E*TRADE is a strong option for IRAs with hundreds of commission-free ETFs and over 4,000 no-transaction-fee mutual funds. Additionally, they don’t have account minimums for IRA accounts.

Read Full Review

Fees:

$0 per trade

Account Minimum:

Open Account

On E*TRADE's Secure Website.

Best for support

Merrill Edge® Self-Directed

Open Account

Our Rating:

Rating image, 4.5 out of 5 stars.

4.5 stars

Bottom Line

Seamless integration and added perks make Merrill Edge a top IRA option. Merrill also scores points for no account minimums and a wealth of no-transaction fee mutual funds.

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Fees:

$0 per trade

Account Minimum:

Special Offer

Get up to $600 when you invest in a new Merrill Edge® Self-Directed account

Open Account

On Merrill Edge® Self-Directed's Secure Website.

Best for beginners

Fidelity

Open Account

Our Rating:

Rating image, 5.0 out of 5 stars.

5.0 stars

Bottom Line

Fidelity is a top option for IRAs with thousands of no-transaction fee mutual funds and hundreds of commission-free ETFs, along with no account fees or account minimums.

Read Full Review

Fees:

$0 per trade

Account Minimum:

Open Account

On Fidelity's Secure Website.

What is a Roth IRA?

A Roth IRA is one of the two major types of individual retirement accounts (also known as IRAs). Investments held in a Roth IRA are allowed to grow and compound on a tax-deferred basis. However, to enjoy the tax benefits of a Roth IRA, you have to keep your money in the account until you reach "retirement age." The IRS defines this as 59 1/2 years old.

These accounts allow everyday Americans to save for retirement on a tax-advantaged basis.

Money contributed to a Roth IRA brokerage account can be invested in nearly any stocks, bonds, mutual funds, or ETFs. If investments held in the account pay dividends or interest, no tax will be due on this income at the end of the year. And if you sell a profitable investment within a Roth IRA brokerage account, you won't pay a dime in capital gains taxes.

You can save for retirement in a standard (taxable) brokerage account, but these tax benefits make Roth IRA accounts a more preferable choice for those who qualify.

There are some exceptions to the withdrawal restrictions. For example, you can withdraw as much as $10,000 from your IRA to use towards a first-time home purchase. You can take out any amount to use to pay for college expenses. And with a Roth IRA, you can withdraw your original contributions (but not your investment profits) at any time, and for any reason.

How does a Roth IRA work?

A Roth IRA is an after-tax retirement account. You contribute money that you've already paid taxes on, and withdrawals are tax-free (provided they meet certain requirements). A Roth IRA is designed to provide the owner with tax-free retirement income. This makes the most sense for people who are in a relatively low tax bracket now, and want to lock in their current tax rate.

It's important to understand how a Roth IRA works before you start investing. Note that you can't take a tax deduction for contributions you make to a Roth IRA. In contrast, you can take a deduction for money you contribute to traditional IRAs and most other retirement accounts.

The best Roth IRA accounts have a couple of unique features that many people find appealing:

You can withdraw your Roth IRA contributions (but not any investment profits) at any time, and for any reason. You've already paid tax on this part of your Roth IRA. In the eyes of the IRS, the money is yours to do with as you please. This feature makes Roth IRAs more appealing to investors who don't want to tie their money up until they're almost 60.
Roth IRAs don't have required minimum distributions, or RMDs, after you turn 72.

How much can you contribute to a Roth IRA?

For 2020, participants can contribute as $6,000 in their IRA accounts. Account owners who are 50 or older can contribute an additional $1,000 as a "catch-up contribution," for a total annual limit of $7,000. This limit is per person, not per account. If you have two IRA accounts -- say, a traditional IRA and Roth IRA -- your total contributions cannot exceed the annual limit.

Are you eligible to contribute to a Roth IRA?

Whether or not you're eligible to contribute to a Roth IRA brokerage account depends on how much money you make in a year. The IRS has income limitations for contributions to Roth IRA accounts. The table below shows the IRS income limits for 2020:

Tax Filing Status	2020 Roth IRA Full Contribution Limit	2020 Roth IRA Contribution Phase-Out Limit
Single or Head of Household	$124,000	$139,000
Married Filing Jointly	$196,000	$206,000
Married Filing Separately	$0	$10,000

Data source: IRS.

These income limits are in place because Roth IRA accounts were created to help everyday Americans save for retirement -- not the wealthy.

For reference, the full contribution limit is the maximum amount of adjusted gross income (AGI) you can have and make a full Roth IRA contribution. The phase-out limit is the AGI threshold above which you can't make any Roth IRA brokerage contributions at all. If your AGI falls in between the two limits, you can make a partial Roth IRA contribution. In other words: You can still contribute, but you'll be limited to somewhat less than the $6,000 (or $7,000) annual limit.

There's one way to contribute to a Roth IRA even if your income is too high. It's known as the backdoor Roth IRA contribution method. With this method, you contribute to a traditional IRA and immediately convert the account to a Roth. Unlike a direct Roth IRA contribution, there are no income restrictions if you do this.

When can you make a Roth IRA contribution?

You can make a Roth IRA contribution starting on the first day of the calendar year and ending on Tax Day. So 2020 contributions could be made any time from Jan. 1, 2020 through April 15, 2021. In fact, if you make a contribution between Jan. 1 and the tax deadline, your Roth IRA provider will likely ask you to choose which tax year you'd like the contribution to be counted for.

Roth IRA contribution limits are set according to the tax year. As mentioned, the limit for 2020 is $6,000 ($7,000 for account owners 50 or older).

Roth IRA vs. traditional IRA

The biggest difference between Roth and traditional IRAs is the tax structure. A traditional IRA gives you your tax benefit now, while a Roth IRA gives you your tax benefit later. Roth IRAs typically make the most sense for investors in the lower tax brackets, while traditional IRAs are generally the wise choice for higher-income savers.

Roth IRA contributions are not tax deductible. Qualified withdrawals from a Roth IRA account, though, are 100% tax-free. Roth IRA accounts are good for who believe their marginal tax rate in retirement will be significantly higher than it is now.

With a traditional IRA, contributions are made on a pre-tax basis. They're tax-deductible in the year they are made. However, the withdrawals from a traditional IRA are taxable income. Traditional IRAs are good for individuals who anticipate a relatively low tax bracket after retirement.

Aside from the tax structure, these account types have several similarities. Both have the same annual contribution limit. Investments within the accounts are tax-deferred for as long as the money stays in the account. There are some other key advantages to a Roth IRA, such as the ability to withdraw contributions at any time and the lack of RMDs. However, the main difference is the tax structure.

What should I look for in a Roth IRA?

Most major brokerage firms offer Roth IRAs, but the best Roth IRA for you depends on your particular investing style and goals. Here are just a few of the most important things to consider when making your decision:

Fees and commissions - Virtually all online-based brokers have done away with commissions on stock trading, but it's important to see what other fees you might run into (most brokers have a page on their website called "pricing" or "fee schedule.") For example, some brokers charge account transfer fees and these can vary considerably.
Mutual funds - If you're planning to invest in mutual funds, you want to make sure that your broker offers a wide selection of mutual funds, and ideally offers thousands of mutual funds on a no-transaction fee (NTF) basis.
Platform/App - Some brokers are known for their no-frills, easy-to-use trading platforms and apps, while others have more complex platforms. Some let you test drive their trading platforms (with play money), and it can also be a good idea to check reviews in the App Store or Google Play Store if you're planning to trade through an app.
Resources - Some of the more full-featured brokers offer things like libraries of educational resources, as well as access to third-party stock research, while some of the lower-frills brokers are designed for people who simply want to buy and sell stocks.

Pros and cons of a Roth IRA

Here's an overview of the pros and cons of Roth IRAs when compared with other types of retirement accounts:

Pros of a Roth IRA	Cons of a Roth IRA
Investments in a Roth IRA grow tax-deferred	You don't get a current-year tax deduction for making Roth IRA contributions
Qualified withdrawals are completely tax-free	The IRA contribution limit is relatively low when compared with 401(k)s, 403(b)s, and most other types of employer-sponsored retirement plans
You can withdraw your Roth IRA contributions at any time, and for any reason, without penalty	Higher-income savers may not qualify to make Roth IRA contributions.
There are no required minimum distributions (RMDs) with Roth IRAs
You can contribute to a Roth IRA for as long as you have earned income, regardless of your age.
In a Roth IRA, you can invest your money in virtually any stocks, bonds, mutual funds, or ETFs you want.

Is a Roth IRA right for me?

A Roth IRA could be right for you if:

You're not worried about saving money on your taxes now.
You would rather keep your taxable income as low as possible after you retire.
You don't qualify for a traditional IRA, but you qualify for a Roth IRA contribution.
You don't want to be forced to withdraw money from your savings after you reach a certain age.
You don't want all of your money to be tied up until you retire.

So why open a Roth IRA? A Roth IRA account can be a great way to set aside money for retirement, but as we've discussed here, it isn't the only option you have. When planning for retirement, there's no such thing as a perfect retirement account for everyone. A Roth IRA is no exception. But with a little research, you can find out which IRA is right for you.

FAQs

What is a Roth IRA?

A Roth IRA is a type of tax-advantaged retirement account. It allows qualified individuals to contribute money, invest it on a tax-deferred basis, and eventually withdraw it tax-free.
How does a Roth IRA work?

Individuals contribute money to a Roth IRA, up to the annual maximum. This investment can grow and compound tax-deferred. Once the account holder turns 59 1/2, they are free to withdraw from their Roth IRA tax-free -- no matter how much their investments have grown.
What's the difference between a Roth IRA and a traditional IRA?

A traditional IRA provides an immediate tax benefit: Qualified contributions are deductible on the individual's current-year tax return. However, withdrawals from a traditional IRA will be considered taxable income. Roth IRA contributions are not tax-deductible, but qualified withdrawals will be completely tax-free.

About the Author

Matt Frankel, CFP

Matt is a Certified Financial Planner® and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice for The Ascent and its parent company The Motley Fool, with more than 4,500 published articles and a 2017 SABEW Best in Business award. Matt writes a weekly investment column ("Ask a Fool") that is syndicated in USA Today, and his work has been regularly featured on CNBC, Fox Business, MSN Money, and many other major outlets. He’s a graduate of the University of South Carolina and Nova Southeastern University, and holds a graduate certificate in financial planning from Florida State University.

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