If you don’t have access to a 401(k) retirement account through your workplace, the next best thing may be an IRA. Standing for individual retirement arrangement, an IRA is a tax-advantaged account that lets you put money aside for the future. But while opening an IRA can be a smart financial decision, selecting the right provider can feel overwhelming.
The best IRA accounts are those with low fees, diverse investment options and convenient features. Here are seven options to consider:
— Charles Schwab.
— American Funds.
— M1 Finance.
— Equity Trust Company.
Keep reading for details on who offers IRAs and how to choose an IRA account provider.
IRA Account Providers
To open an IRA, you need a custodian. The IRA custodian is a financial institution that holds the money for you and ensures all IRS regulations are met. A bank, brokerage firm or insurance company can all serve as an IRA custodian.
“You can also go direct to a mutual fund,” says Kristian Finfrock, financial advisor and founder of Retirement Income Strategies, which has four locations in Wisconsin.
Not all IRA custodians work directly with consumers, though. Pershing LLC is one such example, explains Hector Rivera, certified financial planner and director of investments for Forest Hills Financial Group in New York City. “An individual client wouldn’t use them,” he says, but they are a popular provider for accounts opened and managed by financial planners and institutions.
While you have many choices, here’s a closer look at some of the most popular IRA companies.
Fidelity gets high marks for its broad range of financial products and options and long history of service. In addition to IRAs, the company administers 401(k) accounts, brokerage accounts, 529 college savings plans and more. All that has helped Fidelity assemble an impressive collection of financial planning tools that can benefit IRA holders. Plus, Fidelity operates branches throughout the country for those who want face-to-face service.
“Some people prefer to be more self-directed, while others are looking for automated investing solutions,” says Rita Assaf, vice president of retirement and college leadership at Fidelity Investments. “Since your needs will change as life goes on, it can be helpful to work with a provider who has expertise in all areas.”
The company offers access to more than 10,000 mutual funds, including many with no fees. There is no minimum balance, opening fee or annual cost to open a traditional or Roth IRA at Fidelity, assuming you choose and manage your own investments.
With a Fidelity Go IRA, the company will choose and manage investments based on your goals and risk tolerance. This service is offered free for accounts with less than $10,000 deposited. For those with balances of $10,000-$49,999, there is a $3 per month fee, and accounts holding $50,000 or more are charged 0.35% per year.
Charles Schwab also excels at offering customers access to personalized advice. It provides 24/7 professional guidance and a number of online tools and resources. For those who want to meet with an advisor in person, Charles Schwab has a network of storefront locations throughout the country.
A Schwab IRA can be opened with any amount since there is no minimum balance requirement, and there are no fees to open and maintain the account. Plus, the firm provides access to funds that can be traded online at no charge. Given its strong reputation and diverse offerings, many finance professionals trust Charles Schwab with their clients’ money.
An added benefit is the chance to purchase fractional shares. “They have the ability to offer stocks at a slice,” Rivera says. This can make shares of expensive companies, such as Alphabet, Amazon and AutoZone, more affordable. “It allows people to get access to stocks at a very low (cost),” Rivera notes.
This mutual fund company can be a good choice for cost-conscious consumers. “Vanguard is a very low-cost option,” Finfrock says. On its website, the company notes its average expense ratios are 0.09%, which is 83% lower than the industry average.
What’s more, Vanguard funds tend to outperform their peers. According to the firm, 79% of its stock funds and 96% of its balanced funds have performed better than their peer averages during the past 10 years.
IRA holders get access to target-date funds, which make it simple to invest based on an anticipated retirement age. There are also 200 commission-free Vanguard funds available, and no account service fees are assessed when documentation is sent electronically.
If you’re comfortable managing your IRA online, consider Betterment. The company is a relatively new provider but has quickly made a name for itself as having some of the best IRA accounts for hands-off investors.
As a robo advisor, it recommends a portfolio based on financial needs, but doesn’t necessarily offer the same level of nuanced guidance you’d receive from a financial planner or full-service investment firm. However, the company is a fiduciary, so you can be assured that the recommendations you receive are made with your best interests in mind.
There is no cost to open an IRA at Betterment, and the company charges an annual fee that is 0.25% of the account balance.
American Funds is one of the largest and oldest mutual fund companies in the country. There are more than 40 mutual funds within the American Funds family, and in addition to IRAs, individual investors can open 529 college savings plans or specialized ABLE accounts, which are intended for those living with a disability.
Low fees and above-average returns are two benefits of American Funds. They also originated the multiple-manager approach to fund management, according to Finfrock. That means three to six people may be overseeing a fund’s investments, and this approach ensures a fund’s success isn’t dependent on any one person.
The only downside with an American Funds IRA is that you can’t open an account directly with the company. The firm encourages people to work with a financial advisor who can provide personal assistance.
For those who want the convenience of managing an IRA alongside other financial accounts, M1 Finance offers options to spend, borrow and invest in the same place. Although it’s a newer player in the finance field — having been founded in 2015 — its app will appeal to those who are looking for a sleek interface and a simple investment platform.
M1 Finance can be used for traditional, Roth and SEP IRAs. Account holders can select their own stocks and ETFs or use one of more than 80 “expert pies,” which are portfolios created by the company to meet specific investment goals. Fractional shares can be purchased on the platform as well.
For those who don’t want to spend much time thinking about their retirement savings, M1 allows for automatic contributions and has a dynamic rebalancing feature that will apply contributions first to underweighted segments of a portfolio. M1 Finance doesn’t charge any management fees for its IRAs, although there is a $100 charge for closing an account and a $100 charge for outgoing account transfers.
Equity Trust Company
Self-directed IRAs offer investors more control and additional investment options for their retirement savings. For instance, these accounts allow people to invest in items not normally included in other accounts, such as real estate, precious metals and tax liens.
Equity Trust Company, also known as ETC, is the largest custodian of self-directed IRAs, according to Finfrock. Accounts can be opened online with a one-time setup fee of $50. After that, the company charges an annual maintenance fee based on the account balance. This fee starts at $205 for balances less than $15,000 and goes to $2,150 for balances in excess of $2 million.
While self-directed IRAs provide flexibility, investors might need professional help, particularly if they want to include alternative investments in their portfolio. In that case, consulting with an ERISA attorney may be wise to ensure you don’t run afoul of any laws, Finfrock says.
Understanding IRA Accounts
While contributions to a traditional IRA are tax-deductible, withdrawals in retirement are subject to income tax. Another option is to open a Roth IRA, which doesn’t offer any immediate deduction but does provide tax-free withdrawals in retirement. Up to $6,000 can be contributed to an IRA in 2022, and those age 50 and older can contribute $7,000.
As noted above, IRAs are offered by numerous institutions, from national banks like Citi and Chase to investment firms like Fidelity and Charles Schwab. Plus, a new generation of online investment platforms such as Betterment and Wealthfront cater to those who want a hands-off experience for retirement savings. These new platforms are ideal for do-it-yourself investors who don’t feel the need to work one-on-one with a broker. Meanwhile, those who want their account actively managed by a professional may be best served by an IRA set up by a brokerage firm.
IRA money held in a bank deposit account such as a savings account or certificate of deposit is typically insured for up to $250,000 by the Federal Deposit Insurance Corporation. Meanwhile, the Securities Investor Protection Corporation offers up to $500,000 of protection to customers of member brokerage firms.
[Read: A Guide to Your IRA.]
Tips for Finding the Best IRA Account Provider
There are three main factors to consider when selecting an IRA provider: cost, service and investment options.
“When considering an IRA provider, make sure you consider the fees you’re paying, such as account minimums, annual fees, and trading fees,” Assaf says. “These charges can really add up over the long run.”
Some IRAs charge a percentage of the amount invested while others charge a fee per transaction. Per-transaction fees may range from $4.95 to $9.95 for stocks and up to $49.95 for mutual funds. Many companies offer a number of stocks and ETFs that can be traded for free as well. Meanwhile, percentage fees can be as low as 0.25% of an account balance.
When comparing costs, remember that you typically get what you pay for. Low-cost providers offer less personalized service, while one-on-one advice from a planner will come at a premium.
Robo advisors generally use algorithms to make their recommendations. “You fill out a risk tolerance questionnaire,” Rivera says. The company also takes into account your time horizon — that is, when you expect to use the money — when suggesting an investment portfolio. However, it doesn’t offer the same nuanced advice that you’d get from a professional who can consider the big picture of your personal finances.
If you’re paying more for personalized advice, understand what motivates a company’s recommendations. Not all IRA advisors are fiduciaries. That means they are not legally required to work in your best interest and could try to steer you into investments that result in larger sales commissions.
To help people make investment decisions, some IRA providers give customers a variety of tools such as calculators, investment webinars and research reports. However, consumers need to be wise about how they use that information. For instance, they may lead an investor to move money frequently between funds and pay unnecessary fees when it could be better to simply leave money untouched.
In the end, though, no factor is more important to selecting an IRA provider than its investment choices. “Look for a company that offers a variety of investment options to help meet the needs of every investor, because one size definitely does not fit all,” according to Assaf.
If an IRA doesn’t provide access to high-performing investment funds, a low fee doesn’t benefit you. Instead of choosing an IRA provider based on cost alone, consider what funds are available and how they have performed.
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Update 01/07/22: This story was published at an earlier date and has been updated with new information.