An IRA or individual retirement account is a tool used by individuals to set aside money for retirement. They offer a solid retirement option, especially to those who don't have access to a 401(k).
I've reviewed the best IRA accounts to make your quest for the most lucrative investment a bit easier. Analyze the advantages and disadvantages of each one in relation to your current economic status.
Looking for the Best IRA Accounts: What to Consider
The best IRA accounts and 401(k)s share many similarities which is why Americans often confuse the two. An IRA differs from a 401(k) in that the latter is provided by your employer or company whereas the most common IRAs (Traditional and Roth) are opened by the individual. 68% of working age Americans do not use employer - provided savings plans.
1. Personal Income
Your personal income has a significant impact on whether you should opt for a Traditional IRA account or Roth IRA. Take a look at your income and filing status to determine which type of account you're eligible for. As income rises, you may be ineligible for a Roth IRA. For those who are married filing jointly, at a modified gross adjusted income (MAGI) of $183,000, your ability to contribute to a Roth IRA is gradually reduced, and at a MAGI OF $193,000, you are ineligible for the Roth account.
Those with single filing status see their contributions gradually reduced for a Roth IRA at a MAGI of $116,000, and they become ineligible for a Roth IRA when they hit a MAGI of $131,000. Over these income limits, you must contribute to a traditional IRA instead.
2. Variety of Investment Products
Look for a provider which offers a variety of investment products to choose from. One of the best benefits of funding an IRA account vs. a 401k is that you typically have more diverse investment options rather than be limited to the selections that your employer has chosen for the 401k plan. Diversification is the name of the game so allocate your funds strategically.
The best IRA account providers profiled here offer an excellent range of investment products, but they also offer different styles of managing your investments. The time-honored, typical IRA investment strategy is to define the level of risk you are comfortable with and choose a mutual fund at that risk level to fund your IRA account with. Younger savers tend to tolerate more risk, while older savers closing in on retirement age look to less risky mutual funds and investments.
Some providers like Betterment offer tools to assess your retirement strategy, and once you define your savings goals and level of risk tolerance, they do the rest for you, adjusting the mix of funds in your account to maximize returns over the long haul.
Other providers like OptionsHouse allow IRA account holders to actively trade stocks, mutual funds and other investment products to fund their retirement accounts with. They facilitate the active trader by offer discount trading fees. Those who actively trade to fund their IRA accounts encounter a higher level of risk as they try to beat the market.
3. Low Custodial/Account Fees
Custodial fees are the fiscal amount a financial organization or brokerage charges a client to hold onto their securities. There are a range of fee structures from these IRA account providers. Some are discount online brokers, like TradeKing, opening the door for active traders with low fees for individual trades. Discount brokers may charge fees for other items beyond making trades, so be sure to review the details of their fee structure before opening an account.
Others are full-service brokers with a full range of sophisticated tools and educational resources like TD Ameritrade. The trading fees are higher, but some clients feel that the overall resources and customer support are worth the extra money.
While we're discussing fees, also inquire about any introductory offers on new accounts or rollovers. These offers come and go, but can be quite lucrative when in force.
Finding the Best IRA Account for You: Types of IRAs
There are several types of IRA accounts, the most common being the Traditional IRA and the Roth IRA. There is also the SEP IRA, offering distinct advantages to the self-employed.
What is a Traditional IRA?
A Traditional IRA account allows you to deposit cash and have that money sheltered from taxes until it's withdrawn. In other words, you'll watch your tax-deferred earnings grow over time. This has a number of benefits including the ability to keep dividends, any income earned from interest and the capital gains, without the need to pay the IRS.
When you withdraw the money you'll then be taxed at your then income tax level. If, for whatever reason, you decide to withdraw money before you hit 59 ½, you'll be penalized by an additional 10 percent on top of the income taxes you will pay.
What is a Roth IRA?
A Roth IRA is available to individuals who have "earned income" in the sense that they're working or earning wages from a salary or business at the time of the contribution. Unlike a traditional IRA, however, this type of account has income limits for the amount you can contribute.
Since you fund the account with dollars you've already paid taxes on (and therefore receive no up-front tax breaks) when it's withdrawn at retirement you do not pay taxes on it.
You can contribute a combined total of up to $5,500 to all your Traditional and Roth IRA accounts in a given year. Those aged 50 and up can contribute up to $6,500 per year.
What is a SEP IRA?
A SEP IRA, or simplified employee pension, is a straightforward way to establish pre-tax retirement savings for the self-employed. You can contribute up to 25 percent of your net self-employment income, up to a maximum of up to $53,000 (for 2015 and 2016), quite a bit more than the contribution limits on Traditional or Roth IRA accounts.
The SEP IRA offers the flexibility to wait until you file your return to fund the account. Depending on the ups and downs of your business, you can settle on your yearly retirement savings contribution at the last minute.
What is a Simple IRA?
A SIMPLE IRA, or a savings incentive match plan for employees, is very similar to a 401(k). This type of IRA can be offered by employers or accessed by self-employed individuals. Employees make pre-tax contributions to the account and employers match their contribution.
What is a Rollover IRA?
A Rollover IRA is a retirement account that allows you to move existing IRAs and 401(k) funds into a new account. This is often used to combine several IRA accounts into one larger fund.
The Best Roth IRA vs Traditional IRA
With a traditional individual retirement account (IRA), you can make tax-deferred (pre-tax) contributions to a specific account while working, with the hope that the account's balance will grow substantially by the time you retire. A Roth IRA allows you to make contributions that are not tax-deductible, meaning you fund a Roth IRA with your net income.
To determine whether you should look for the best Roth IRA provider or whether a traditional IRA would do the trick, go through all features of both features, apply them to your situation, seek help from a specialist if investing and taxation are not your forte, and make a decision that meshes well with your budget and existing financial condition.
IRA Contribution Limits
Roth IRA: You can contribute sums to the account up to the year's regular threshold. There is a catch-up contribution the law grants to people who are age 50 or older by the end of the year.
Traditional IRA: Same thing.
Roth IRA: You can never deduct contributions you made.
Traditional IRA: You can deduct contributions, depending on your income, status when filing your income tax return, and active participant status. According to Internal Revenue Service directives, you are an active participant if you are enrolled in a company-sponsored retirement plan, such as a qualified annuity plan, SIMPLE IRA or SEP IRA.
Mandated Minimum Distribution
Roth IRA: As an account owner, you are not subject to mandated minimum distribution rules, also called required minimum distribution rules – but your beneficiaries are.
Traditional IRA: When you turn 70 ½, you can start distributing small amounts of your IRA beginning April 1 of the following year.
Roth IRA: You can take distributions at any time, and you do not pay taxes and penalties on the withdrawals if qualified. Penalty-free distributions include unreimbursed health care costs, disability, medical insurance, home purchases and inherited IRA assets.
Traditional IRA: You can take distributions whenever you want. If you are age 59 ½ or younger, you would pay income tax on the distribution because the IRS would treat the earnings are ordinary income.
IRA Investment Income
Roth IRA: Income you earn on your IRA assets is tax deferred. You don't pay taxes on qualified distributions, such as money you fork over to treat disability.
Traditional IRA: Income also grows tax-deferred but is added to your taxable income in the year when the distribution occurs.
Income Limits for Contributions
Roth IRA: You may be subject to income caps for contribution that the IRS periodically updates. Check the agency's website and ask your investment adviser to learn more about the limits you could face.
Traditional IRA: Depending on your income, you would not be subject to income caps for contribution. Again, the best way to determine whether you are subject to caps is to enquire with your investment advisor or IRA plan administrator.
You should do a quick "compare and contrast" analysis to determine whether looking for the best Roth IRA providers or a traditional IRA is more advantageous to your situation. To make a fast and effective determination, pay attention to things like contribution limits, deductibility and required minimum distribution. Other elements to heed include distribution procedures, income limits for contributions, and how to treat earnings derived from your Roth IRA or traditional IRA.
In a nutshell, just remember that you make pre-tax contribution to a traditional IRA and you pay taxes upon withdrawal, whereas in a Roth IRA scheme, you make contributions from your take-home pay but the withdrawals are tax-free – subject, of course, to myriad rules the IRS has implemented over the years.
The Best Roth IRA Providers - Customer Satisfaction
Access to a team of certified and trained representatives is central to your own personal satisfaction. Whether they have local branches you can visit or are available via telephone or the web, communication is key. You should feel like the company is doing the best they can to keep you informed and up-to-date on your earnings. Scottrade has over 500 local offices, the most of any online broker.
Before opening an IRA account, review the customer service options of each company you are considering, visiting their customer service and FAQ pages. Check into customer ratings and feedback on their customer service record.
After many hours of research and analyzing, I've collated all providers into a list of the best IRA accounts for this year.
The Best IRA Accounts
- Very low trade fees
- Low trade commissions
- No account minimum
- No set-up/ annual fees
- Use-friendly website
- $50 fee for opening and closing account
- Customer service only available on weekdays
- Low BBB Rating
TradeKing is a discount online broker, where you can fund your IRA with mutual funds, stocks and more for very low trading fees. They offer an excellent variety of mutual funds. There are some account fees that can crop up, such as a $50 annual fee if your IRA account balance falls under $2,500. There is a termination fee of $50 if you close your account.
TD Ameritrade Review
- Virtual trading options to help practice strategies
- Third party investment research
- Excellent platforms
- Reliable customer service
- Some high fees
TD Ameritrade is renowned as a full service online broker who gets it right. They offer great service and superior online tools and resources. While their fees are on the high end, some features are included for free that discount brokers might charge for, such as live streaming quotes. TD Ameritrade is a great choice for an IRA invested in mutual funds for the long term.
- Excellent customer service
- No fees for account maintenance/inactivity
- 3,000+ mutual funds to choose from
- 500+ local branches
- IRA calculator
- 0.5% of principal value commission for stocks under $1
Scottrade is an online broker offering traditional and Roth IRA accounts with over 3000 mutual funds to choose from, no account maintenance fee and excellent customer service. The trading fees are reasonable, right between the discount and full service brokers, and the online knowledge center keeps investors up to date on maximizing their returns.
- Lower fees the more you invest
- Excellent customer service
- No minimum deposit
- Intuitive technology
- Percentage fees can be high
Betterment sets up IRA accounts via its online Retirement Guide, conducting a complete analysis of your retirement goals and financial situation. They fund your IRA account according to your needs via their ingenious in-house software, maximizing results while charging a tiny percentage of your balance for the service. For balances of less than $10,000, you must auto deposit $100 per month, or face a $3 per month fee.
- Low stock trading fees
- No custodial fees
- Designed around options platforms
- Good mobile management
- Low contract fees and commissions
- Very little mutual fund access
- High fees for trading within mutual funds
- $20 fee to close IRA
OptionsHouse is another discount online broker offering IRA accounts. They are a great option if you are an active trader, with their low fees per trade. OptionsHouse offers online tools geared towards developing trading strategies, and also hosts a virtual account for trading practice. OptionsHouse does not offer a large variety of mutual funds.
Advice for Finding the Best IRA Accounts
As you consider your options for opening an IRA account, take a few minutes to explore our advice guides to round out your knowledge on the ins-and-outs of individual retirement accounts. Here are a few examples of what to consider prior to opening an IRA, and choosing investments to fund it with:
- Is the lowest fee IRA really the best deal? Certainly, you want to keep the fees and trading commissions associated with your IRA account to a minimum, but also consider choices of financial product to invest in, and the fit of any IRA account provider with your financial situation and goals as you look for the best low-fee IRA account.
- Is a SEP IRA the right choice for you? It may be just the thing if you are self-employed and enjoy a high income, as you can contribute up to 25% of your net earnings to a SEP IRA. If you have employees, watch out, as you may be required to contribute an employer's share to their SEP-IRAs. Check into what is a SEP IRA to see if it will work for your financial situation.
- Certainly, it's a great idea to maximize your retirement savings via an IRA account, but what other moves can you make as you plan for retirement? Have you considered investing in real estate? Here's our guide to three smart ways to plan for retirement.
- As you consider which type of IRA account to open, it's important to look at Traditional vs. Roth IRAs and scrutinize the pros and cons of each as they relate to your financial situation and retirement goals.
- Are you familiar with the details of your 401k retirement account offered by your employer? Your company's human resources department should have all the pertinent info you need, but the onus is on you to ensure that you are taking advantage of all the features of your 401k. If you do not have a 401k account, take a look at your options for saving for retirement without a 401k.
- Those who decide to set up a traditional IRA account can read through our tips on making it work for your financial situation and retirement goals, including how to pick a mutual fund in line with your risk tolerance and overall savings goal.
- While an IRA account is a key element in your retirement, don't neglect to do your estate planning to ensure ease of transition for your family and heirs. Take a few moments to read our article on simple steps to making a will.
- As you plan your retirement, make a checklist of expenses you'll need to cover. These include medical expenses, housing and vacation costs, and possibly even care of your elderly parents. Here's our primer on retirement expenses to look out for.
Become familiar with the pros and cons of each of the five providers mentioned here before making your decision on which company to choose for your IRA account. Take into consideration their fee structures, investment options, and educational and customer service tools.
Some people enjoy a full-service broker offering a lot of help and a huge array of mutual funds, while others will want a bare-bones discount broker allowing them to trade actively for low fees. I've found that there are a few options that present viable solutions for both financial situations and retirement scenarios.
If you are looking for short-term savings accounts, take a look at our review of the best online savings accounts or our look at the best CD rates. These options give you a place to keep your money for shorter periods to earn minimal returns.