Which Investment Companies Should You Open Your Roth IRA With?

Published 2/27/08 (Modified 6/17/11)
By MoneyBlueBook

So you're thinking of opening a Roth IRA account? Congratulations! Although it's only one small step forward in sound financial planning, it's one giant leap towards building your financial future and saving for retirement. By now you've likely settled on which investment retirement account (IRA) vehicle is best for you. There are three major types - Roth IRA, deductible IRA, and the non deductible IRA. All offer tax deferral benefits but the retirement account that is most appropriate for the majority of ordinary individuals and married couples is the Roth IRA. Unlike traditional IRA's (both tax-deductible and non-deductible), Roth IRA's enjoy several great advantages and benefits which make them very attractive for those who want to invest and plan for their future retirement. Here is what every prospective Roth IRA investor and account holder should know:

  1. Withdraws from Roth IRA's after age 59.5 are generally not taxed, because you pay your taxes on the front end by contributing after tax dollars.
  2. Because most people steadily increase their total income over time as they get older, they usually either stay in the same marginal tax bracket or end up at a higher bracket level at retirement. Thus, Roth IRAs enable savvy savers at retirement to accumulate more money than even tax-deductible IRA's.
  3. Unlike a traditional IRA, not everyone is eligible to open and contribute to a Roth IRA. For both 2009 and 2010, the Roth contribution limit is $5,000 as long as your income falls below $105,000 if you're single, and $166,000 if you're married filing a joint tax return. There are income phaseouts after that.
  4. Unlike a traditional IRA, with a Roth you can withdraw your original contribution money at any time for any emergency reason, tax free, and without penalty and you don't have to replace the funds, unlike a 401K or a traditional IRA. Of course, it's always best not to withdraw because that stops the compound interest process.

Choosing The Best Broker To Open Your ROTH IRA Account With, And What To Look For:

The majority of investors choose to start their retirement savings with a Roth IRA. The best course of action is to open the account with a reputable broker rather than a bank. Some banks and credit unions offer retirement accounts but their choice of investment vehicles like certificate of deposits are often limited with low rates of return. Here are some basic criteria you should take into consideration when deciding which broker to open your Roth IRA account with:

  1. Choice Of Investment Options Including Mutual Funds and Exchange Traded Funds (ETF's) - A Roth account is merely the account type. With the funds your contribute to it, you can use it to trade any type of investment vehicle you wish from stocks, bonds, to mutual funds.
  2. Low Commission Costs and Account Fees - My recommendation for new investors is to stick with mutual funds and low cost index funds. Always make sure the maintenance fees for funds are reasonable.
  3. Automatic Contribution - For those who wish to invest regularly, try to look for a retirement broker that offers the ability to make automated fund transfers into your Roth from your linked bank account.
  4. Minimum Balance Requirement - Most brokers have minimum initial investment and balance requirements. For new investors, the minimum requirement may be an initial hurdle if the limit is to high. However, even for those who only want to start up with a few hundred dollars, there are options available.

Investing In Mutual Funds - The Best Approach For New Roth IRA Account Holders

New Roth investors should put their money primarily into mutual or index funds. Here are two of the top brokerage firms that specialize in their own family of mutual funds and have built a reputable track record of solid returns. For new retirement account holders and those who are unsure about their investment approach, low cost, no load mutual funds are the less volatile and smarter way to invest for your future.

1) Fidelity - (Sign Up) - Fidelity Investments is where I chose to open my Roth IRA account and it's also the place where I manage my 401k. I like their clean and easy to use website interface and the fact that they have a very established track record. They offer a basic approach to opening a Traditional or Roth IRA. The minimum investment requirement is $2,500, but that amount is waived if you can commit to future automatic monthly contributions of $200 per month. For new and young investors who don't have $2,500 to invest right away, they can start out with just $200 and agree to put in $200 per month in the future.

Fidelity offers a huge variety of attractive mutual fund and index fund options, many of which have no transaction fees (although minimum balance requirements for Fidelity's index funds are rather high at $10,000). With a Fidelity account, you can trade Fidelity family funds for free, although there may be early redemption fees.

2) Vanguard - (Sign Up) - Vanguard is most well known for offering one of those lowest expense ratios for access to their family of Vanguard index funds. Opening a Roth with Vanguard will enable you to trade Vanguard mutual funds for free as well. While they ordinarily charge an annual $20 fee for each Vanguard fund account with a balance under $10,000, the maintenance fee is completely waived and eliminated if you simply register for account access on Vanguard.com and agree to accept electronic delivery of statements, reports, and other shareholder materials through Vanguard's e-service package.

For most Vanguard funds, the minimum investment requirement requirement is $3,000 per fund. However, with the broadly indexed Vanguard STAR Fund (VGSTX), the initial minimum balance requirement is only $1,000. The STAR Fund is a stable fund well suited for the beginner retirement account investor with limited funds to start. Once your investment has grown, you can always upgrade to one of the more targeted Vanguard Life Cycle Funds designed to suit investors depending according to their target retirement date. For me, I would choose the Target Retirement 2045 fund (VTIVX).

Vanguard expense ratios are quite low - a predictable trademark of most Vanguard funds. Vanguard is probably best suited for fund investors who want to concentrate their investing efforts primarily in index and mutual funds rather than individual stocks, the best course for the vast majority of investors.

Investing In Exchange Traded Funds and Individual Stocks - Another Approach For Roth IRA Investors

Currently there is an investment movement away from loaded investments and expensive adviser managed funds, and towards exchange traded funds (ETF). ETF's are attractive because not only do they track the diversified performance of broad indexes, they also offer very low expense ratios and may be easily traded like ordinary stocks. If ETF's are your intended approach, then you will need to find a Roth IRA discount broker that offers low per trade commissions and low fees. Here are a few low cost discount brokers that I either have accounts with or have had a history of positive trading experiences with:

Top Discount Broker Picks For Roth IRA Investors Who Want To Trade ETF's And Individual Stocks

1) Zecco - (Sign Up) - Zecco was one of the pioneers for the movement towards free stock trades. Although it has since scaled back the terms of its original free trade promotion, this discount broker still offers a great commission deal for free equity trades. Currently, account holders receive 10 free trades per month so long as they can maintain at least $2,500 in total account equity, which includes the total value of cash and stock positions. Otherwise, individual equity transactions for market and limit orders cost $4.50 per trade. Although there is technically no minimum balance investment requirement, if you want to take advantage of the free trade offer, you should maintain at least $2,500 in your account.

2) TradeKing - (Sign Up) - Notice: For a limited time only, TradeKing is offering new account applicants a free instant $50 bonus in their brokerage account when they fund and trade via the provided link). TradeKing is a popular deep discount broker that offers very low commission fees. Currently, each market and limit trade costs $4.95 per trade. There are no annual fees for IRA accounts and no minimum balance investment requirements to open a Roth account. For more background info about this deep discounter, check out my online review of TradeKing.

3)�� E-Trade - (Sign Up) - Right now, Etrade is offering 100 free stock and option trades (no commissions) for new IRA account registrations. This is a pretty amazing deal, especially coming from such an established brand name broker. Those who prefer no hassle financial accounts will also appreciate E-trade's no fee, no minimum balance approach to IRA's and Roth IRA's. This may be the best time to hop on board, while this particular limited time ETrade promotion is still active.

4) ShareBuilder - (Sign Up) - Exclusive $25 bonus offer for new accounts - ShareBuilder has established itself as a popular discount broker, offering comparatively low commission fees for equity transactions at $4 per trade through automatic investment plans, and $9.95 for regular real time market orders. There is no minimum investment balance requirement to open a new Roth or an ordinary brokerage account. The $25 annual fee is waived if you sign up for a trading plan other than their basic plan.

New ShareBuilder Promotion Codes: (Updated)

  • 25WOLS - Free $25 offer after sign up

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20 Responses to “Roth IRA | Investment Companies | Investment Broker | Money Blue Book” 

  1. Tony Leach says:

    moneybluebook -

    Thanks for including Zecco in the lineup here. I agree that we're great place to get started with your IRA - Roth or otherwise. Did you get a chance to check out ZeccoShare at all? It's another great part of Zecco (in my opinion), since you can check out what other people are investing in, like popular ETF's, and follow what top-performing investors are doing.

    Let me know what you think, if you get that chance!

    - Tony Leach (Zecco Product Manager)

  2. Mzcap says:

    I am glad you use Fidelity Investments - it's a good choice. As a RIA, I offer retirement planning and investment management services through Fidelity. I found them to be very good.

  3. Kevin says:

    I changed jobs about a year ago and my former 401K was thru NewYorkLife. My new employer uses Fidelity for 401K. I do have a Roth IRA thru Fidelity, and was considering rolling my 401K from NYL to Fidelity just for ease of mgmt. However, in the spirit of diversification... i am wondering if anyone thinks it would be prudent to keep retirement savings diversified amongst different mgmt companies? How horrible would it be if some day we learned that Fidelity went down the path of Enron..
    They are a massive company, and only getting bigger. I am wondering if perhaps bigger is not always better.
    Are there qualifying events to move IRA from one company to another? Or am I free to move anytime? Thanks for any advice.

  4. Compare Roth IRAs says:

    If you're a passive investor, then Vanguard is the best hands down. Nobody can beat their low cost index funds and impressive track record.

    For active investors who prefers stocks and other investments, I recommend Fidelity, Zecco, or Tradeking. I have a Fidelity Account, and even though the $20 trades can hurt, I love their tools and impressive research trackers.

    I keep my watchlist there, and it's easy to track hundreds of stocks in separate categories.

    Also, hat tip for the promotion codes. Will add those to my website as well.

  5. Jessica says:

    I've been looking at Fidelity, and received this from their support people regarding trading within the Roth IRA:

    1 to 1,000 shares: $10.95
    1,001 or more shares: $10.95 plus $0.015 per share over 1,000 shares
    Minimum: $10.95
    Maximum: 5% of principal, subject to minimum commission

    So, in theory, if I had $100,000 in my Roth IRA, and wanted to sell all, it would cost me $5000??

  6. Raymond says:

    Jessica,

    Good grief, That definitely does not look right. I think there is a maximum cap but I'm not absolutely certain on this. I would advise you to direct this particularly Roth IRA commissions question to Fidelity customer support. They have an excellent online chat feature for customer questions and ample telephone support to match. I've bombarded them with a myriad of detailed questions before and they've always answered them thoroughly.

  7. Jessica says:

    Raymond:
    Thanks for the reply. Yes, I emailed Fidelity yesterday and will see what they have to say. What are your experiences with Roth IRA transactions? I suspect the various brokers need to be competitive. Should I expect Roth IRA transactions to be similarly priced as standard stock trades/transactions?

  8. Raymond says:

    For everyone in general (since I've been receiving emails regarding this question)...To be eligible to contribute to an IRA or Roth at all, you must meet the earned income minimum requirement.

    In order to make a contribution to your IRA or Roth retirement broker account, you must have taxable compensation (not taxable income from investments). For example, if you make only $3000 in taxable compensation, your maximum IRA contribution can only be $3000 for the year.

    As always, remember that IRA's and Roth's are use it or lose it retirement vehicles. You can't make back contributions for past years.

  9. Melissa says:

    I am searching for the perfect roth IRA. I worked part time at a hospital and have money that is awarded and vested to me. I would like to invest in a Roth IRA, but do not know how to determine which one is best for me. I am 27 yrs old and need advice. Please help.

  10. Finanseer says:

    Melissa:

    I would recommend Vanguard, if you don't plan on active trading. You can open a Roth IRA and allocate to a target retirement fund, or a wide variety of other index funds. Low costs and easy even for beginners.

  11. John says:

    Thank you for this information! I was about to sign up with Chase Roth IRA account, but after reading this information, I believe I should look into more options such as Vanguard and Fidelity.

  12. Jessica says:

    I went with Ameritrade. Their fee structure is very simple. It's always about $10 per trade, no matter how many shares. Plus their tools are pretty good, since they purchased thinkorswim.com

  13. Mike says:

    I am looking for the right company to open a Roth IRA account. I mainly will invest in mutual funds and targeted funds, but I do want to put money into stocks also. The biggest concern of mine is to have low management costs and to have good tools. What do you think would be the best choice for me?

  14. Jessica says:

    Mike:
    I've tried several brokerage places and liked Ameritrade best. The site is very intuitive, and their fees are simple. It's always $10 per trade no matter how many shares.

  15. Mike says:

    Thanks for the advice I will check them out.

  16. kevin says:

    Scottrade, aren't they one of the best discount brokerages. I would rate them above E-trade for sure because of the price and they have actual offices, unlike places like Tradeking and Zecco.

  17. thuy says:

    I would like to open a Roth IRA, currently have a 403B with Fidelity. I am new to investment. I would like to invest in mutual funds and targeted funds and in the future, when I get more experience and learn more about the investment market, I would like to put my money into stocks. Question: should I open my Roth IRA with Fidelity to stick with the same institution or should I open t with Scottrade, since there's less commission and fees involved? Thank you

  18. Penny says:

    What is wrong with opening up a roth Ira with your local bank if they offer investments in mutual funds?

  19. muneer says:

    Here's the best roth ira brokerages available

    Fidelity Investments offers a no-fee IRA. There's a $2,500 minimum initial deposit, but this is waived if you commit to $200/month automatic contributions. They offer 4,500 mutual funds, about a quarter of which have no transaction fee. In short, you can open a no-cost IRA at Fidelity with a $200 starting investment if you invest in mutual funds and you agree to contribute $200/month. Apply for a Roth IRA with Fidelity.
    Source: http://www.definerothira.com

    It's also possible to open a no-cost Roth IRA at The Vanguard Group. To do this, you must elect to receive electronic statements and start with $1000 in the company's STAR fund. (The STAR fund is an mutual fund of mutual funds, a safe choice for beginners.) Additional contributions require a minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50. There are no fees to purchase the STAR fund. Start a Roth IRA at Vanguard.

    T. Rowe Price charges $10/year for Roth IRA accounts until you have a balance above $5,000, after which there is no fee. You need $1,000 to open your IRA, but this minimum goes away if you sign up to contribute at least $50/month with the Automatic Asset Builder. There are no sales fees or commissions to invest this money in T. Rowe Price mutual funds

  20. Rachel says:

    Hi, I am 26 and I want to start a Roth IRA. I am planning on going back to school in the next year for nursing, but I had a nice tax return this year and I want to kick start my retirement (even though I'll be incurring more debt via school).

    Is this smart? I just want to start small $1,000 - $1,500 this year. I want to play it safe for the first few years, since I'm new and starting small.

    I don't really want to pay fees. Is Vanguard best?

    Eventually, I'll want to take more risks with stocks, but once I have more to play with.

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