What Is an IRA?
An individual retirement account (IRA) is an investment vehicle that helps you save for retirement in a tax-advantaged manner. Depending on the type of IRA you open, this could mean either tax-exempt growth on your contributions or up-front tax deductions on your contributions along with tax-deferred growth.
The tax breaks associated with IRAs can be incredibly valuable because they help your savings grow faster. You can reap the benefits of an IRA at any age, but the earlier you open an IRA, the better. The more time you have to capitalize on the powerful effect of compound interest, the larger your retirement nest egg will grow.
What Are the Best IRA Companies?
The list is comprised of discount brokers, which are known for having low fees and a high degree of accessibility. Banks don’t make the cut, given their limited investment options (CDs and other savings accounts). High-end brokerage firms are also excluded, because the hands-on attention and advice they offer often fails to justify the cost.
Best IRA Companies
What Are the Different Types of IRAs I Can Purchase?
There are two primary types of IRAs, the traditional IRA and the Roth IRA. With a traditional IRA, contributions are generally tax-deductible in the year they are made. The contributions are invested and grow during your working years. Then, in retirement, all withdrawals you make are taxed at your current income tax rate.
In contrast, with a Roth IRA, there is no upfront tax deduction on your contributions. The contributions are invested and grow during your working years. Then, in retirement, all withdrawals are free from taxation.
Which Is Better?
When deciding whether it makes more sense to open a traditional IRA or a Roth IRA, the most important factor to consider is whether you expect to be in a higher tax bracket during your working years or during your retirement years.
- A traditional IRA is better if you expect to be in a higher tax bracket during your working years.
- A Roth IRA is better if you expect to be in a higher tax bracket in retirement.
Unfortunately, given the unpredictable nature of economic cycles, geopolitical events and tax legislation, making an accurate prediction of your future tax rates is nearly impossible. Therefore, assuming you do not have other retirement accounts, it’s smart to put a portion of your retirement savings into a traditional IRA and a portion into a Roth IRA.
Maintaining two IRAs is fairly easy. More importantly, it will give you flexibility when it comes time to make income distributions in retirement. During years when you don’t have much (or any) income, it’s wise to make withdrawals from your traditional account because this money has never been taxed. During years when your income is higher (and your tax bracket is higher), it’s better to make withdrawals from your Roth account because the money will be tax-exempt.
Where Can I Open an IRA?
You can open an IRA through a diversified investment company, a dedicated brokerage firm or a banking institution. Generally, you will have the most investment options if you choose an investment company or a brokerage firm. Offerings from banks are often limited to certificates of deposit (CDs) and other savings accounts.
If you work with a financial advisor, they can guide you through the process of opening an IRA. If you don’t have a financial advisor, you can work directly with the IRA provider. The process of setting up an IRA is generally very simple and can usually be completed in less than 15 minutes. You’ll just need to provide some key identifying information about yourself.
What to Look for When Selecting an IRA Company
Now that you know how easy it is to open an IRA, let’s focus on what to look for in a provider. The list below outlines some of the most important things you should consider when evaluating IRA companies.
First, consider your investment experience and how much investment management assistance you’ll need. Are you self-sufficient or will you need guidance and ongoing support?
Self-directed IRAs are ideal for do-it-yourself investors who have clear investment goals and a good understanding of their tolerance for risk. For those who want help creating and maintaining their portfolio, automated robo-advisors can be a cost-effective solution. And for those who need hands-on human interaction and highly customized offerings, full-service brokerage firms are the best option.
Next, review the breadth of investment options offered by an IRA provider. IRAs can hold a variety of assets, including stocks, bonds, alternative investments, cash and fund-style vehicles that contain various combinations of assets.
Even though IRAs can hold a variety of assets, not all IRA providers will provide the same options. The best IRA companies offer all potential assets, but less competitive providers will have more limited offerings. Be sure to choose a company that will not hold you back from certain investment opportunities.
The IRS specifically prohibits IRAs from holding life insurance contracts, collectibles and certain types of derivative instruments. If you want to hold gold or cryptocurrency in an IRA, you will have to open an IRA specifically designed to house those assets.
Evaluate the account fee structure. Depending on the level of service you’ll need, some fees are unavoidable. Nevertheless, you should try to avoid unnecessary and excessive fees, as they can have a serious drag on your investment performance and eat away at your savings. Keep the following ideas in mind as you assess IRA companies.
- Account setup fees are rare and could point to a potentially unscrupulous provider.
- Maintenance fees are also fairly unusual.
- Commissions on investment trades are common and can range from a few dollars per trade to $100 or more per trade, depending on the type of asset being bought or sold. Fortunately, the best discount brokers have completely eliminated this expense for online trades of stocks and exchange-traded funds (ETFs).
- Investment management fees are another common charge. You can easily avoid this expense if you’re a self-directed investor, but if you want advisory service, you’ll need to pay for it. Fortunately, technology-related advancements in data analysis and artificial intelligence are driving down the cost of automated investment advice, but high-touch, human-to-human service will always be more expensive.
Check for an account minimum requirement. Some providers require a minimum initial contribution to open an IRA. The minimum is most often imposed on accounts serviced by robo-advisors or full-service brokers. Self-directed IRAs usually don’t have account minimum requirements.
Finally, consider the availability of supplemental services. Many IRA providers offer a variety of educational resources, reports and analysis tools to help support your investment endeavors. Some of these offerings are free; others will require a premium subscription.
As you consider your IRA options, remember that any money you put into these accounts is portable. If you open an IRA and lose confidence in the provider, you can move your money to a new IRA with another provider. That said, you’ll need to be mindful of potential tax liabilities that may be triggered when you move money around.
To avoid unnecessary taxes, be sure to only execute what’s known as like-kind transfers (traditional to traditional, or Roth to Roth). Additionally, take care to ensure the transfer is conducted in a way that aligns with IRS guidelines. Your financial advisor or IRA provider can assist with transfers and IRA rollovers.
As a reminder, you must have earned income to contribute to any kind of IRA.