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Roth IRAs are retirement accounts that can help you grow money tax-free. But just because every Roth IRA follows the same tax rules and structure doesn't mean every IRA provider will offer you the same value.
We've broken down our best Roth IRA accounts into two categories: Best Roth IRAs for Self-Directed Investing and Best Roth IRAs for Hands-Off Investing. Self-directed brokers will be controlled by you -- you will buy and sell your own investments on your own timeline.
Our hands-off Roth IRA accounts are robo-advisors. These are platforms will help you assess your risk tolerance and determine your investment time horizon, and then it manages your portfolio over time to maximize return potential. Depending on your investment goals and individual preferences, either could be a great choice.
There are a lot of options to compare, even on this page. It can be overwhelming! If you're looking for a place to start, here are three Roth IRA accounts our experts recommend and why they like them:
With no commission fees, access to trade fractional shares, and many investment types, Robinhood's high-quality app trading platform is best suited for beginner investors wanting a solid place to invest on the go.
$0 for stocks, ETFs, and options
$0
On Robinhood's Secure Website.
SoFi stands out with a simple IRA setup process and low fees, in addition to a wealth of other products at your fingertips.
$0 for stocks, $0 for options contracts
$0
For new accounts: Get up to $1,000 in stock when you fund a new Active Invest account. For IRAs: SoFi will match 1% of your contributions to your IRA.
On SoFi Active Investing's Secure Website.
We rate Fidelity as one of the best Roth IRA accounts with pretty much every feature you’d need: an intuitive platform and tools, a strong selection of funds and ETFs, excellent customer service, and no account fees or account minimums.
No account fees to open a Fidelity retail IRA
$0
On Fidelity's Secure Website.
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 Roth IRA accounts.
Commission-free; other fees apply
$0
On E*TRADE's Secure Website.
Merrill Edge® Self-Directed offers seamless integration and added perks, making it one of the best Roth IRA platforms. Merrill also scores points for no account minimums and a wealth of no-transaction fee mutual funds.
$0 for online stock and ETF trades
$0
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.
$0 stock and ETF trades
$0
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.
$0 online; $0 by phone; $25 broker-assisted fee for ETF trades from other companies (Less than $1 million)
$0
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. Its lineup of retirement accounts expands beyond just online access to robust account management capabilities via its mobile app.
$0 stock and ETF trades
$0
Over Labor Day weekend (Sept. 2 - Sept. 5, 2023), most TD Ameritrade accounts were transitioned to Charles Schwab accounts. We’ve removed TD Ameritrade from our list of Best Roth IRA Accounts since any new accounts will be transitioned to Charles Schwab accounts in the future. Here at The Ascent, you can trust that we’re constantly evaluating our top broker picks to bring you the most up-to-date information.
Wealthfront is a robo-advisor that offers great value with a robust mix of account types, low fees, and a low account minimum.
$0 per trade, management fee 0.25%
$500
Betterment is a robo-advisor with a great mix of features: low fees, no account minimum, fractional shares, and socially responsible investment options.
$0 per trade, management fee 0.25%
$10
Most major brokerage firms offer Roth IRAs, but that doesn't mean every broker's Roth IRA will offer the same features. With that in mind, here are four factors to compare as you're shopping for the best Roth IRA broker.
Broker/Advisor | Best For | Commissions | Next Steps | |
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Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Mobile platform |
Commission:
$0 for stocks, ETFs, and options |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Low fees |
Commission:
$0 for stocks, $0 for options contracts |
|
![]()
Rating image, 5.0 out of 5 stars.
5.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 5.0 out of 5 stars.
5.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Beginner and advanced investors |
Commission:
No account fees to open a Fidelity retail IRA |
|
Rating image, 4.0 out of 5 stars.
4.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.0 out of 5 stars.
4.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Mutual fund investing |
Commission:
$0 per trade |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Mobile platform |
Commission:
Commission-free; other fees apply |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Customer support |
Commission:
$0 for online stock and ETF trades |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Low fees |
Commission:
$0 stock and ETF trades |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Index funds |
Commission:
$0 online; $0 by phone; $25 broker-assisted fee for ETF trades from other companies (Less than $1 million) |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Retirement investors |
Commission:
$0 stock and ETF trades |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Hands-off investors |
Commission:
$0 per trade, management fee 0.25% |
|
![]()
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
Best For:
Low-cost passive investing |
Commission:
$0 per trade, management fee 0.25% |
A Roth IRA is an individual retirement account (IRA) that lets you contribute after-tax dollars and enjoy the power of compound interest tax-free. That means you don't have to pay taxes on earnings in a Roth IRA, so long as you take distributions after you hit 59 1/2 years old.
Roth IRA accounts have annual contribution limits set by the IRS, which are usually lower than 401(k)s. You can invest in a number of securities within a Roth IRA, such as stocks, bonds, mutual funds, or exchange-traded funds (ETFs).
There are some exceptions to the withdrawal restrictions. For example, you can withdraw as much as $10,000 from your IRA to use toward a first-time home purchase. You can take out any amount to pay for college expenses. And with Roth IRA accounts, you can withdraw your original contributions (but not your investment profits) at any time and for any reason.
Learn more: Roth IRA benefits
A Roth IRA works like this: You contribute post-tax dollars (money you've already paid taxes on), then invest that money in whatever securities fit your investing strategy, like stocks or mutual funds. At any time, you can sell those securities for a profit and you don't have to pay capital gains taxes, so long as it's held within your Roth IRA. Better yet, when you turn 59 ½, you can withdraw your earnings tax-free, since you already paid taxes on your contributions.
Roth IRAs let you withdraw your contributions freely without penalty, but your earnings might be subject to taxes or penalties if you withdraw before you pass the 59 ½ mark or before the account has been open at least five years. Unlike traditional IRAs and 401(k)s, you don't have to take minimum required distributions, meaning there's no age after which you have to start withdrawing from your Roth IRA.
Contributing up to the annual limit will certainly give your Roth IRA a good foot forward, but your selection of investments is the real engine driving your account's long-term growth. Since your account isn't bogged down by capital gains taxes, you can take full advantage of growing your money by compound interest using a combination of stocks, ETFs, mutual funds, bonds, and other securities.
For instance, let's say you contribute $6,000 annually into your Roth IRA for 25 years and choose to invest in an S&P 500 index fund. If we assume a modest 7% annualized rate of return for this fund, your account would grow to $438,623 at the end of 25 years, with $150,000 in contributions and $282,623 from interest you've earned.
For tax year 2023, contributions to your IRA accounts cannot exceed:
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.
Whether you're eligible to contribute to a Roth IRA brokerage account depends on your modified adjusted gross income (known as modified AGI or MAGI). This is your adjusted gross income (read: what the IRS uses to calculate your tax bill), plus deductions and exemptions added back in. For 2023, the MAGI income limits are the following:
Tax Filing Status | Modified AGI | Modified AGI | Modified AGI |
---|---|---|---|
Single or Head of Household | Less than $138,000 (full contribution allowed) | $138,000-$153,000 (reduced contribution allowed) | $153,000 or more (not eligible) |
Married Filing Jointly | Less than $218,000 (full contribution allowed) | $218,000-$228,000 (reduced contribution allowed) | $228,000 or more (not eligible) |
Married Filing Separately | Less than $10,000 (reduced contribution allowed) | $10,000 or more (not eligible) | -- |
If your income is too high, you might be able to contribute through 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.
Opening a Roth IRA can be boiled down to a few simple steps. If you've compared the best Roth IRA accounts and you're ready to open an account of your own, here's everything you need to get your Roth IRA up and running:
Most Roth IRA providers can approve you instantly (or at least within a few business days), so long as they can verify your identity. Once your account has been approved, you can transfer money into your Roth IRA, pick your investments, and continue contributing until you hit the annual limit.
You can make a Roth IRA contribution starting on the first day of the calendar year and ending on Tax Day. So 2023 contributions could be made any time from Jan. 1, 2023, through April 15, 2024. 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.
RELATED: Many people have their contributions automatically deducted from their bank. See The Ascent's roundup of the best checking accounts.
The biggest advantage of Roth IRA accounts is that typically, younger workers have lower tax rates at the early stage of their careers. As such, they prepay taxes at a lower rate (compared with tax rates at later stages of their careers -- even if no tax rule changes), and any capital gains accumulated in the account are tax free upon withdrawal. Younger workers also have a longer investment horizon, so starting investing early really helps.Joyce Beebe, Ph.D. Fellow in Public Finance at Rice University's Baker Institute for Public Policy
A traditional IRA is funded with pre-tax dollars, that is, money you haven't paid taxes on. This money is deducted from your gross income and can potentially lower your tax bill for the year you made the contribution. When it comes time to withdraw money from a traditional IRA, you'll pay taxes at whatever tax bracket you fall into.
Don't miss that: With a traditional IRA, you receive your tax benefit now in the form of reduced taxable income. In exchange for that reduction, you pay taxes on traditional IRA distributions in retirement. A Roth IRA, however, is funded with after-tax dollars and doesn't reduce your taxable income. However, with a Roth IRA, you receive your tax benefit later in the form of tax-free distributions.
To decide which IRA is right for you, you have to figure out which will save you the most on your lifetime taxes.
Typically, traditional IRAs are ideal for high-income earners who anticipate having a lower tax rate in retirement. You can reduce your taxable income today (potentially saving on this year's taxes) and withdraw at a time when you're not earning as much income and can fall into a lower tax bracket. For example, if your tax rate is 39% today but you expect a 22% rate in retirement, then it would be wise to defer paying taxes until you fall into that lower tax bracket.
Conversely, Roth IRAs usually make sense for those who are in lower tax brackets today, but anticipate being in a higher tax bracket in retirement. If your tax rate is lower today then you'll save more by paying taxes at your current rate rather than waiting until retirement. For instance, if your tax rate is 12% today, but you anticipate a rate of at least 22% in retirement, it would be wise to pay taxes today and withdraw tax-free later.
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.
A 401(k) is great for retirement savers because it has a higher annual contribution limit than Roth IRAs. Much like traditional IRAs, 401(k)s also give you a tax benefit now, as your contributions are pre-tax, meaning they're deducted from your gross income and could help you save money on taxes. In exchange for that tax deferral, you'll pay taxes on 401(k) distributions at whatever your tax bracket is at that time.
Roth IRAs, however, have some muscle of their own. Your annual contribution limits may be smaller, but you don't have to worry about pesky required minimum distributions (RMDs), which require 401(k) holders to start withdrawing at age 72. And while Roth IRAs can't reduce your taxable income, you also don't have to pay taxes on distributions in retirement.
But 401(k)s have the ultimate trump card in one regard: employer matches. That's right, if your employer will match your 401(k) contribution, don't hesitate to take the match (that's free money!).
TIP
Here's an overview of the pros and cons of Roth IRAs when compared with other types of retirement accounts:
Pros | Cons |
---|---|
Investments in a Roth IRA grow tax-free. | You can reduce your taxable income. |
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. | No employer matching contributions |
You can contribute to a Roth IRA for as long as you have earned income, regardless of your age. | More flexibility might tempt you to withdraw for reasons other than retirement |
In a Roth IRA, you can invest your money in virtually any stocks, bonds, mutual funds, or ETFs you want. | The five year rule might make these accounts less ideal for those nearing a retirement age. |
A Roth IRA could be right for you if:
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 our guidance and a little research, you can find the best place to open a Roth IRA with ease.
Joyce Beebe, Ph.D.
Fellow in Public Finance at Rice University's Baker Institute for Public Policy
What misconceptions might millennials or Gen Z have about Roth IRAs and planning for retirement?
Many millennials or Gen Z think they cannot contribute to Roth IRA (or IRA) until they start a formal job -- for instance, after graduating from college or graduate school. This is not the case; as long as an individual has earned income, he/she can contribute to an IRA up to the $6,500 annual contribution limit (for 2023) or 100% of his/her earned income, whichever is less.
Roth IRA has income limits. For single taxpayers, if his/her income exceeds $138,000, the contribution starts to phase out. When his/her income reaches $153,000, the taxpayer is not allowed to make any Roth contributions. As younger workers advance their careers, they are likely to be capped out. They are also more likely to be subject to the income limit if they live in high cost of living cities. In addition, as younger workers get married, their Roth contribution is subject to the "marriage penalty" -- the income limit for married filing jointly is $218,000 (fully phased out at $228,000), which are not doubles of the single amounts ($138,000 and $153,000).
Another misconception is that self-employed (SE) workers cannot contribute to Roth, but your website has another article that covered this recently. As such, I did not talk about the income from SE workers. A point to note is IRS's definition about "self-employed" is a lot wider than many in younger generations realize. In many cases, their side business income can qualify as SE income, hence is allowed for Roth IRA contributions.
How can I determine if a Roth IRA makes sense for me?
Assuming investors have enough funds to save for retirement, they should consider all options available to them -- most likely Roth IRA and employer plans such as 401(k) accounts. However, be mindful that from a tax perspective, they are different. They are also very different from account administration and plan design perspectives. For tax, Roth IRAs are "after tax" in that taxpayers do not receive deductions for the contributions made. 401(k) contributions are "pre-tax" in that the contributions are tax-deductible. In addition, many employer plans provide matching for 401(k) contributions, and a recent Congressional proposal, if it passes, will allow employer plans to match participants' student loan payments, similar to those of retirement plans.
Many researchers think that, given the current level of the U.S. deficit, it is highly likely that future tax rates will increase to finance government expenditures and debt payments. If one believes this to be the case, prepaying taxes under Roth IRA will be an attractive option.
One more note is that although many have touted that there are no penalties or taxes to withdraw one's Roth contributions as a benefit, there may be tax consequences for withdrawing the earnings/capital gains before the retirement age. The IRS provides several exceptions; however, it is still not ideal to view Roth IRA as an emergency savings account.
What is the biggest advantage to using a Roth IRA?
The biggest advantage of Roth IRAs is that typically, younger workers have lower tax rates at the early stage of their careers. As such, they prepay taxes at a lower rate (compared with tax rates at later stages of their careers -- even if no tax rule changes), and any capital gains accumulated in the account are tax free upon withdrawal. Younger workers also have a longer investment horizon, so starting investing early really helps.
Not everyone’s Roth can be subject to astonishing returns like Peter Thiel's, and Congress is considering adding restrictions to the Roth IRA. However, these cases should not prevent younger workers from starting contributions to a Roth IRA early on.
John Banko
Wells Fargo Faculty Fellow, Senior Lecturer
What are some pros and cons of creating an IRA?
IRAs have one main advantage -- gains are not taxed for a long time. For me, the distinction between the Roth IRA and traditional IRA is just details and perhaps something to talk about with a tax pro. But whether you picked correctly (minimized taxes) will be answered when you retire. IRAs have one main disadvantage: the funds are somewhat locked up until you retire. If a situation arises where you need the funds before the IRS-defined age of retirement, there are penalties, extra forms, notes from your mom -- unneeded hassle to get the money. Hassle that is not the case in a non-IRA investment account.
How actively do investors need to manage their IRA in order to get the most gain?
If you start trading, even occasionally, then taxes come into play. The IRA will defer the taxes. The non-IRA account will be subject to taxes on gains if shares are sold.
Who should open an IRA?
If you believe you should save for retirement, and you want to take advantage of the U.S. system for doing that, the IRA will likely promote a long-term savings plan, offer reasonable returns given the risk, have a tax advantage, and your employer will likely help facilitate all this. But it needs to be part of a well-designed retirement plan, and is likely only one element of that plan. An IRA is no guarantee of a solid retirement, and it certainly has risks. Step one is developing a plan with concrete goals. With that, an IRA is likely in the mix.
Jason Reed
Associate Teaching Professor of Finance
What are some pros and cons of creating an IRA?
Investors looking to maximize their contributions toward retirement should really think about opening an IRA alongside any employer-sponsored retirement program. There are limited downsides and the upside of saving for retirement with an IRA can be life-changing. When making the decision to open and invest in an IRA, deciding between a traditional or Roth IRA can offer different pros and cons.
For either type of IRA, however, you will have access to traditional financial assets like stocks, bonds, ETFs, mutual funds, and money markets. Investors can choose their level of participation in growth, but for almost everyone, a consistent contribution to an ETF with broad market exposure coupled with a hands-off approach is best. Set it and forget it. That's your biggest risk-adjusted bang for your buck.
The biggest difference between a traditional and Roth IRA is how your contributions are taxed. For some, a Roth IRA's after-tax contributions are considered a benefit, especially if you expect to retire in a higher income tax bracket. You really can let your investment grow tax-free. On the other hand, since a traditional IRA offers income tax deductions, it might be just the nudge you need to begin investing in an IRA.
One potential downside to investing in a Roth IRA is that for high-income earners, you might not actually be eligible to make contributions. This would obviously limit the effectiveness of this investment vehicle. Similarly, for high-income earners, your traditional IRA contributions may not be fully tax deductible.
Additionally, both IRA options do have a contribution cap. Depending on your age, you'll be able to contribute up to either $6,500 or $7,500 per year. Moreover, traditional IRA investors are required to begin mandatory divestments starting at age 70 ½ or 72 (depending on your birthday). This isn't the case, however, with Roth IRAs. Again, you can let your investment grow well into retirement.
Another potential con to a traditional IRA is that early withdrawals are penalized 10% on top of taxes owed (some exceptions are allowed). On the other hand, since Roth IRAs are after-tax investment vehicles, you are allowed to withdraw your contributions penalty- and tax-free.
You can have as many Roth IRA accounts as you want, but it's important to know that the annual maximum contribution is per person, not per account. In other words, if you have two Roth IRAs, your total contribution between both accounts cannot exceed $6,500 (or $7,500 if you're 50 or older) for 2023.
Roth IRA accounts are generally best for people who are in the lower tax brackets now or who want to avoid taxes entirely in retirement. If you're in a high tax bracket and qualify for a traditional IRA, it may be the smarter move for you. However, Roth IRAs have other key benefits, such as the absence of required minimum distributions and the flexibility to withdraw your contributions whenever you want.
Less than you might think. Many of our top brokers will allow you to open a Roth IRA with as little as one dollar. You may need more to start investing -- for example, you might need enough to purchase at least one share of whatever stock or ETF you're looking at -- but you can open an account with very little money.
If you're older than 59 1/2 and your Roth IRA has been open for at least five years, you can withdraw as much as you want without any penalties or tax implications. However, it's important to note that you can withdraw your original contributions at any time and for any reason.
For a tax- and penalty-free withdrawal of investment gains, your Roth IRA must have been open for at least five years, and you must be at least 59 1/2 years old. But you can withdraw the contributions you've made to a Roth IRA at any time and for any reason.
Roth IRAs are excellent for retirement savers who want flexibility. You can withdraw your Roth IRA contributions (but not investment gains) at any time, and it generally takes no longer than a day or two to do so.
Yes, as long as you qualify based on your income. If your other retirement account is a traditional IRA, your overall IRA contribution to both accounts cannot exceed the annual maximum. For 2023, this is $6,500, or $7,500 if you're 50 or older.
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Robinhood disclosure
All investments involve risk and loss of principal is possible.
Securities are offered through Robinhood Financial LLC, member FINRA/SIPC. Cryptocurrency services are offered through an account with Robinhood Crypto, LLC (NMLS ID 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency held through Robinhood Crypto is not FDIC insured or SIPC protected. For more information see the Robinhood Crypto Risk Disclosure.
Trades of stocks, ETFs and options are commission-free at Robinhood Financial LLC. Other fees may apply. Please see Robinhood Financial’s Fee Schedule to learn more.
Fractional shares are illiquid outside of Robinhood and are not transferable. Not all securities available through Robinhood are eligible for fractional share orders. For a complete explanation of conditions, restrictions and limitations associated with fractional shares, see the Fractional Shares section of our Customer Agreement.
Robinhood Gold is an account offering premium services available for a $5 monthly fee. Not all investors will be eligible to trade on Margin. Margin investing involves the risk of greater investment losses. Additional interest charges may apply depending on the amount of margin used. Bigger Instant Deposits are only available if your Instant Deposits status is in good standing.
E*TRADE services are available just to U.S. residents.
Betterment disclaimers
†Betterment Cash Reserve ("Cash Reserve") is offered by Betterment LLC. Clients of Betterment LLC participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients' funds are deposited into one or more banks ("Program Banks") where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.
Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity—e.g., individual or joint—at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC's Form ADV Part II.
**The annual percentage yield ("APY") on the deposit balances in Betterment Cash Reserve ("Cash Reserve") is 4.00% and represents the weighted average of the APY on deposit balances at the banks participating in Cash Reserve (the "Program Banks") and is current as of Feb. 6, 2023. This APY is variable and subject to change daily. Deposit balances are not allocated equally among the participating Program Banks. A minimum deposit of $10 is required, but there is no minimum balance required to be maintained. The APY available to a customer may be lower if that customer designates a bank or banks as ineligible to receive deposits. APY applies only to Cash Reserve and does not apply to checking accounts held through Betterment Checking. Cash Reserve and Betterment Checking are separate offerings and are not linked accounts.
For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance.
Vanguard disclosures
Visit vanguard.com to obtain a prospectus or, if available, a summary prospectus, for Vanguard and non-Vanguard funds offered through Vanguard Brokerage Services. The prospectus contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
Options are a leveraged investment and are not suitable for every investor. Options involve risk, including the possibility that you could lose more money than you invest. Before buying or selling options, you must receive a copy of Characteristics and Risks of Standardized Options issued by OCC. A copy of this booklet is available at theocc.com. It may also be obtained from your broker, any exchange on which options are traded, or by contacting OCC at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 (888-678-4667 or 888-OPTIONS). The booklet contains information on options issued by OCC. It is intended for educational purposes. No statement in the booklet should be construed as a recommendation to buy or sell a security or to provide investment advice. For further assistance, please call The Options Industry Council (OIC) helpline at 888-OPTIONS or visit optionseducation.org for more information. The OIC can provide you with balanced options education and tools to assist you with your options questions and trading.
Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. All ETFs are subject to management fees and expenses; refer to each ETF's prospectus for more information. Account service fees may also apply. All ETF sales are subject to a securities transaction fee. See the HYPERLINK "https://investor.vanguard.com/investing/transaction-fees-commissions/etfs" Vanguard Brokerage Services commission and fee schedules for full details.
Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC. Brokerage assets are held by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC.
Vanguard Marketing Corporation, Distributor of the Vanguard Funds