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How and Where to Open a Roth IRA

April 16, 2019
Investing, Retirement Planning, Roth IRA
Best Savings Rates May 2018
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A Roth IRA is a true gift for retirement savers: While there’s no immediate tax benefit, withdrawals in retirement are completely tax-free. But there are some rules for Roth IRAs, including income limits.

There are three steps to starting a Roth IRA:

  1. Decide what type of investor you are. Hands-on or hands-off?
  2. Choose a provider and open your Roth IRA. Your choice should align with your investor type above. Opening a Roth account is simple and generally only takes about 15 minutes.
  3. Select your investments. If you go with a broker, look for low-cost mutual funds and ETFs. If you choose a robo-advisor, they’ll pick these for you. (Most banks offer savings products, rather than investments, so they’re generally not the best place to open a Roth IRA, which should be geared toward long-term growth.)

Read on for more details on each of these steps.

1. Decide what type of investor you are

  • If you’re a “do-it-yourself” investor, choose a brokerage. You can open a Roth IRA at an online broker and then choose your own investments. This may be simpler than you think — you can build a diversified portfolio with just three or four mutual funds. When comparing brokers, look at trade commissions and investment fees (also called expense ratios). Check out our roundup of the best Roth IRA brokers.
  • If you’re a “manage it for me” investor, choose a robo-advisor. If you’d rather have someone pick an investment portfolio for you, you can open your Roth IRA at a robo-advisor. Robo-advisors are online services that build and maintain a diversified portfolio for you. You pay a small fee for the service, but their fees generally are far lower than a human financial advisor. See our top picks for robo-advisors.

2. Choose a provider and open your Roth IRA

Best Roth IRA brokers for “do-it-yourself” investors

For people who want to pick their own investments, opening a Roth IRA at an online broker makes a lot of sense. At the best brokers, you’ll find a large list of low-cost investments to choose from, including index mutual funds and exchange-traded funds. The top brokers also offer extensive retirement planning tools, robust customer service and reasonable account minimums and fees. And you maintain complete control over how your retirement funds are invested.

Here are two of the favorites from our 2019 analysis:

NerdWallet rating

Fees

$6.95

per trade

Account minimum

$0

Promotion

$100-$600

in cash bonus with a qualifying deposit

The bottom line

Merrill Edge offers high-quality customer service, robust research, low commissions and fees — all with no account minimum for IRA investors. Customers of parent company Bank of America will love the seamless, thoughtful integration, with a single login to access both accounts.

Show pros & cons

Pros

  • Robust third-party research.

  • Ongoing promotions for opening and funding a qualified IRA account.

Reader favorite

Cons

  • No commission-free ETFs for IRA investors.

  • Minimum balance requirement for high-end platform.

Read full review
NerdWallet rating

Fees

$6.95

per trade

Account minimum

$0

Promotion

Up to $600

in cash bonus with a qualifying deposit

The bottom line

Retirement investors will find a lot to love with E-Trade’s IRA offering, including a large line-up of no-trading-fee mutual funds and an extensive library of retirement advice and tools. Plus, there’s no minimum account balance.

Show pros & cons

Pros

  • No minimum balance for IRAs

  • Extensive research and tools

  • 156 commission-free ETFs

  • 4,400+ no-transaction-fee (NTF) mutual funds

Reader favorite

Cons

  • $19.99 cost for trading non-NTF mutual funds

  • Higher trading fees for low-volume ETF and stock traders

Read full review

Best Roth IRA robo-advisors for “manage it for me” investors

For people who want to invest for retirement but don’t want to worry about managing their portfolio over time, a robo-advisor is an easy choice. Generally, robo-advisors hire investment pros to develop a handful of portfolios aimed at different types of investors. Some robos offer portfolios that vary based on amount of risk, with “aggressive” ones for people who want a high percentage of their portfolio in stocks and “conservative” for people who seek a less volatile investment account.

As an investor, all you have to do is open your Roth IRA, link your bank account and follow the steps the provider uses to build your portfolio. The robo-advisor then purchases the investments for you and manages the account over time. Many robos also offer services that can help maximize your savings, such as goal-setting tools to get your finances on track, and strategies to reduce your tax bill. (Robo-advisors generally are registered investment advisors, operating under a similar structure to human investment advisors.)

NerdWallet rating

Fees

0.25%

management fee

Account minimum

$500

Promotion

$5,000

amount of assets managed for free

The bottom line

Wealthfront takes the hassle out of IRA investing. The robo-advisor manages accounts by constructing portfolios out of low-cost ETFs, with a flat and low-cost fee structure that appeals to investors seeking a hands-off approach. What’s more, the company has built client trust by offering free management on the first $5,000 invested (for NerdWallet readers).

Show pros & cons

Pros

  • Low-cost, hassle-free approach to IRA investing.

  • First $5,000 managed free (for NerdWallet readers).

  • Automatic rebalancing.

  • Free automated tax-loss harvesting.

Reader favorite

Cons

  • No large-balance discounts.

  • No access to human advisors.

Read full review
NerdWallet rating

Fees

0.25%

management fee

Account minimum

$0

Promotion

Up to 1 year

of free management with a qualifying deposit

The bottom line

With its low-cost ETFs, automatic rebalancing, extensive tax strategies and retirement advice, Betterment is a strong bet for retirement investors. Betterment’s planning tools include advice on “asset location” — which types of investments are best for different types of accounts — and investors can sync outside accounts, as well.

Show pros & cons

Pros

  • No account minimum.

  • Extensive tax strategies.

  • Robust goal-based tools.

  • Free automated tax-loss harvesting.

Reader favorite

Cons

  • Limited investment options.

Read full review

3. Select your investments

A Roth IRA is an account, not an investment. Contributing is just the first step. If you want to build wealth over time, you need to invest that money.

If you’re a hands-off investor, you can choose a robo-advisor and they’ll choose a diversified investment portfolio for you.

If you’re a DIY type, you can get that diversification on your own for less by building a portfolio out of index funds and ETFs. To do that, you’ll want to decide how much of your money to put toward riskier investments, like stock funds, and how much you want to keep relatively safe, in bond funds and cash. This mix is called your asset allocation.

IRAs give you access to a large pool of investment options. Once you’ve decided on your allocation, you can select specific funds to meet that.

If you get stuck? Use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them, being sure to rebalance as needed since they won’t be doing it for you.

» Dig deeper: Check out these simple investments for retirement goals

Is that it?

That’s it. Except, a handful of considerations:

  • If you have a 401(k) that offers matching dollars and you’re not contributing enough to earn them all, that’s where you should direct your retirement savings first.
  • There are two main types of IRA: Roth and traditional. Traditional IRAs can come with an upfront tax break, but we generally recommend the Roth for those who qualify, and here’s why: Early withdrawal rules are much more flexible with a Roth, and there are fewer restrictions for retirees. Plus, unless you’re an extremely disciplined saver, you’ll end up with more after-tax money in a Roth IRA. Here’s more on a Roth vs. traditional IRA.
  • Once you figure out how much you can contribute, consider setting up automatic transfers. Not only do you avoid the hassle of initiating the transfer each month, but you ensure you’re saving regularly. (Also, some brokers waive their initial deposit requirement if you agree to automatic transfers each month.)
  • Be sure you don’t contribute too much. Contributing more than the limit may leave you subject to an IRS penalty. If your goal is to spread that $6,000 over a year, contribute $500 a month in 2019. If you’re 50 or older, you can put in $583.33 a month. Keep in mind that the contribution limit is for all your IRA accounts combined — if you have a Roth and a traditional, that limit is a total across both accounts.

Got more questions? We have answers

Many brokerages offer competitive Roth IRAs. NerdWallet’s analysis of the best Roth IRA accounts can help identify providers that align with your needs.

The good news is that the IRS doesn’t require a minimum amount to open a Roth IRA. While there’s a Roth IRA maximum contribution amount, there’s no minimum, according to IRS rules. The less-good news is that some providers do require account minimums to get started investing, so if you’ve only got $50 or so, find a provider who doesn’t require one. Keep in mind, too, that many mutual funds have minimums of $1,000 or more, so if you’ve got less than that, you might be limited in the investments you can choose. Still, there are plenty of investments that have no or a low account minimum.

Generally, you don’t need to pay a fee to open a Roth IRA, but there are some costs. 1) This isn’t a fee, but some brokers and robo-advisors require a minimum amount to open an account, so you’ll either have to come up with that dollar figure or choose a provider with no or low minimums. 2) This, too, isn’t a fee, but you’ll need enough money to buy whatever investments you want in your Roth IRA. Some mutual funds have a $1,000, or higher, minimum investment (though once you make that initial investment, generally you can add to your investment with smaller amounts — as small as, say, $20). Some investments don’t have minimums at all. 3) Some brokers charge trading commissions when you buy or sell investments. 4) If you invest in mutual funds or ETFs, you’ll pay an expense ratio and possibly other fees as well. The good news is many popular index mutual funds have very low fees — some charge 0.3% or less.

See our Roth IRA rules page, which provides current details on annual contribution limits, income eligibility and withdrawal rules.

Our complete Roth IRA guide is home to a wide range of articles and tools, including pages dedicated to how to invest within your IRA and calculating the potential value of your Roth contributions at various levels of return.

Yes. Moving your funds from a 401(k) at a former employer to a Roth IRA is a reasonably straightforward process, and most 401(k) and IRA providers are well-equipped to handle it. You would roll your 401(k) money to a traditional IRA, and then convert to a Roth. Keep in mind that when moving regular 401(k) or IRA money to a Roth, generally income taxes are due at that point. You can learn how it all works in our 401(k) rollover guide.

There are lots of factors to consider here, including your income, desired retirement age, monthly expenses, health status and future Social Security benefit levels. Our retirement calculator can help you gauge whether you’re saving enough to ensure a comfortable retirement.

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