Invest Retirement

HerMoney How-To: Where to Open an IRA

Dayana Yochim  |  February 20, 2020

Discount broker, bank, mutual fund company or robo advisor? The best place to open an IRA depends on how you want to invest and whether you want help.

Competition for your retirement savings dollars is fierce. That’s great news if you’re looking for a low-cost, reputable place to open an IRA — never before have consumers had so many options! That’s also the bad news: Never before have consumers had so many options.

So many choices; so many questions: Should I open an IRA at a big-name brokerage firm? Invest through a mutual fund company? Use an automated portfolio management service? Or set up an IRA at a bank?

The answer depends on how you want to invest your money and how much help you want. In general…

  • Opening an IRA at a brokerage gives you the largest choice of investments and investment flexibility within your IRA.
  • Using a mutual fund company as your IRA home base may provide access to funds you otherwise wouldn’t be able to invest in, and may help you skirt some investment commissions.
  • Using an automated investment service (aka a robo advisor) will streamline the process and require the least amount of hands-on money management.
  • Opening an IRA at a bank is the least flexible option and will limit your ability to build a properly diversified retirement portfolio.

Here’s a more detailed look at your IRA account options.

Opening an IRA at a brokerage firm

Fidelity, Charles Schwab (which is in the midst of acquiring TD Ameritrade), E-Trade, Merrill Edge — IRAs are the bread and butter of these big-name discount brokerage firms. Opening an IRA through a brokerage gives you access to the entire breadth of investment offerings you need for your retirement account.

Best for: DIY investors who want to build and manage your own portfolio within your IRA. Especially good if you want the flexibility to invest in a variety of assets (individual stocks, mutual funds, ETFs, bonds) or try your hand at more sophisticated investing strategies such as trading options.

What you’ll pay: Most brokers have done away with trading commissions on stocks and ETFs and have no required account minimums to open an account. Some mutual funds may be subject to a commission (and minimum investment) when purchased through a brokerage account.

Look for: Portfolio management tools, mutual fund and ETF screens, recommendation lists, educational content and a healthy a lineup of no-load and no-transaction fee (read: “no commission”) mutual funds.

Robo-advisor managed IRAs

Automated portfolio management services are like putting your IRA in an Uber: Simply tell them your destination and sit back while they calculate the best route and take the wheel. Upstart robos like Wealthfront and Betterment (and later SoFi and the female-focused Ellevest) started the trend. OG brokerage firms also have robo-offerings (e.g. Fidelity Go, Schwab Intelligent Portfolios) with very competitive rates.

Best for: Hands-off savers who want low-cost professional portfolio management. These services decide on the best asset allocation based on your timeline and temperament, handle rebalancing and make adjustments to keep you on track.

What you’ll pay: Most robos charge a portfolio management fee (0.25% to 0.5% of your account balance). That’s a lot less than the 1% to 2% a traditional financial advisor charges. In addition to the management fee you’ll pay the internal investment fees (expense ratios) charged by the ETFs (mini mutual funds) within the portfolio (All investors pay those, btw, regardless of who is managing your portfolio.)

Look for: Low portfolio management fees, low investment expense ratios, additional tools/services to help you manage other aspects of your finances. Some providers allow a certain level of customization within your portfolio if that’s important to you.

Investing directly through a mutual fund company

Buying from a fund company versus buying a company’s mutual funds through a larger brokerage firm is like the difference between shopping at a specialty grocer instead of a large supermarket: It’s good if your tastes are particular, but your choices can be limited. However, some of the large fund companies sell competitors’ funds alongside their own.

Best for: Investors who want to invest in a specific mutual fund that is only offered to customers who buy directly. It’s also handy if you have a workplace plan administered by one of the majors (or are doing a 401(k) rollover into an IRA) and you want to keep your money at a single institution.

What you’ll pay: Although account minimums may be low, the actual minimum required investment to buy into one of the mutual funds may be $1,000 to $2,000 or more. Some fund companies waive trading commissions on their own funds but charge them to purchase a competitors’ funds. You’ll also pay the mutual fund’s expense ratio (the internal management fee) regardless of where you buy the fund. However lately many large fund companies have started offering zero-fee funds in their lineup.

Look for: Account/mutual fund investment minimums that work with your budget. Also note any account maintenance fees and see if there’s an easy way to get them waived, such as signing up for electronic statements or automatic monthly deposits. If you plan to venture outside of a fund company’s own brand, make sure they offer the array of other investments you need.

Bank IRAs

Although bank IRAs offer the same tax advantages as a traditional or Roth IRA, your investment choices are limited to very conservative investments, such as Certificates of Deposit (CDs). The lack of choice makes it impossible to diversify your holdings to get the long-term growth you need on your retirement savings. In fact, your savings will struggle to even keep up with inflation.

Best for: The lack of investment flexibility makes opening an IRA at a bank a poor choice for most savers. Even if you’re nearing or in retirement and want the bulk of your cash invested conservatively, you’re better off with a brokerage or robo since they offer CDs and bonds as well as other asset classes you need to balance out your portfolio.

What you’ll pay: Bank IRAs often have higher initial minimum deposit requirements. Because CDs lock up your money for a fixed period of time, you’ll have to pay a penalty fee (or give up some or all of the interest you’ve earned) if you want to move your money before the CD term has expired. They may also charge account management fees.

Look for: Any other IRA option, honestly.

More on IRAs from HerMoney:

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