5 Popular Places to Open an IRA in 2023

Ezra Summers

June 28, 2023

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An Individual Retirement Account, or IRA, is a personal savings plan offering tax advantages for retirement savings. Understanding the various options and platforms available for opening an IRA is essential in preparing for your financial future.

There are a wide variety of popular firms for opening an IRA. From Fidelity, Vanguard and Charles Schwab to Betterment and Wealthfront, it can seem like there are endless possibilities.

What is an IRA?

An IRA is an investment account that allows your earnings to grow tax-deferred or tax-free. Tax-deferred means you will only pay taxes on your investment earnings once you start withdrawing the money in retirement. Tax-free means you won’t pay taxes on your investment earnings at all, provided certain conditions are met.

The main difference between IRAs and 401(k)s is that while your employer may offer a 401(k), IRAs are opened individually.

Top Places to Open an IRA

1. Fidelity

Fidelity is a well-respected name in the financial services industry, offering both Traditional and Roth IRAs with no account minimums or opening fees. You can freely choose your investments from a broad range of options or use Fidelity Go, their robo-advisor service, for a fee.

2. Vanguard

Vanguard is another popular choice, particularly known for its low-cost index funds. Vanguard doesn’t charge an account opening fee for its IRAs, but there’s a $1,000 minimum to invest in most Vanguard mutual funds. Vanguard offers a robo-advisor service called Vanguard Digital Advisor, for which there is an advisory fee.

3. Charles Schwab

Charles Schwab offers IRAs with no minimum account balance and no opening fees. They offer a wide range of investment options, including stocks, bonds, ETFs, mutual funds, and more. Charles Schwab’s robo-advisor service, Schwab Intelligent Portfolios, offers portfolio management at no additional cost, though it does require a $5,000 minimum investment.

4. Betterment

Betterment is a robo-advisor platform that offers both Traditional and Roth IRAs with no minimum balance. The annual fee is 0.25% of your balance for the basic digital plan. Since Betterment is a robo-advisor, they choose and manage your investments based on your risk tolerance and investment goals.

5. Wealthfront

Finally, Wealthfront is another robo-advisor platform offering IRA accounts. There’s a $500 minimum account balance and a 0.25% annual advisory fee. Like Betterment, Wealthfront chooses and manages your investments for you.

Types of IRAs

There are two main types of IRAs:

Traditional IRA – Contributions to a Traditional IRA may be tax-deductible in the year they are made, but you’ll pay income taxes on withdrawals in retirement.
Roth IRA – Contributions to a Roth IRA are made with after-tax dollars, meaning you pay taxes now, but withdrawals in retirement are tax-free.

However, you may consider the other IRAs types in some scenarios:

SEP IRA:

Self-employed individuals or small business owners who want to contribute a higher percentage of income to a retirement account.
Businesses with few or no employees other than the business owner(s) who want to make tax-deductible contributions for themselves and potentially eligible employees.
Individuals seeking a straightforward and cost-effective retirement plan with higher contribution limits compared to Traditional or Roth IRAs.

SIMPLE IRA:

Small businesses or self-employed individuals seeking an affordable and easy-to-administer retirement plan.
Employers who want to provide a retirement benefit to employees and allow them to make salary deferrals.
Businesses with 100 or fewer employees who want to make tax-deductible contributions for themselves and their employees.

Self-Directed IRA:

Experienced investors who desire more control and flexibility over their investment choices.
Individuals interested in alternative investments beyond traditional stocks and bonds, such as real estate, private equity, or precious metals.
Investors who understand the risks associated with alternative investments and are willing to conduct thorough research.

Inherited IRA:

Individuals who have inherited an IRA or retirement account from a deceased account owner.
Beneficiaries who want to continue tax-deferred or tax-free growth of the inherited assets.
Individuals who wish to stretch distributions over their lifetime to potentially maximize tax advantages.

It’s crucial to consult with a financial advisor or tax professional who can evaluate your situation and provide personalized guidance on the most suitable type of IRA for your needs.

IRA Type	Pros	Cons
Traditional IRA	– Contributions may be tax-deductible, reducing taxable income. – Tax-deferred growth, meaning investment earnings are not taxed until withdrawal. – May be advantageous for individuals expecting lower tax rates in retirement.	– Withdrawals in retirement are subject to ordinary income tax. – Mandatory withdrawals (required minimum distributions – RMDs) starting at age 72. – Early withdrawals before age 59 ½ may incur a 10% penalty and income tax.
Roth IRA	– Qualified withdrawals in retirement are tax-free. – Contributions can be withdrawn penalty-free at any time. – No mandatory withdrawals during the account owner’s lifetime. – May be advantageous for individuals expecting higher tax rates in retirement.	– Contributions are not tax-deductible. – Income limits for contributions. – Early withdrawals of investment earnings before age 59 ½ may incur a 10% penalty and income tax.
SEP IRA	– Higher contribution limits compared to Traditional/Roth IRAs. – Contributions are tax-deductible, reducing taxable income. – Flexibility for self-employed individuals or small business owners to contribute and potentially receive employer tax deductions.	– Contributions limited to either 25% of compensation or a specified dollar amount (whichever is less). – Mandatory contributions for eligible employees if the employer contributes for themselves. – Early withdrawals before age 59 ½ may incur a 10% penalty and income tax.
SIMPLE IRA	– Easy to set up and administer for small businesses. – Employer contributions are tax-deductible. – Employees can contribute through salary deferrals.	– Lower contribution limits compared to SEP/401(k) plans. – Employer matching or nonelective contributions required. – Early withdrawals before age 59 ½ may incur a 10% penalty and income tax.
Self-Directed IRA	– Offers a wide range of investment options beyond traditional stocks and bonds. – Potential for higher returns with alternative investments like real estate, private equity, or precious metals. – Tax advantages similar to Traditional/Roth IRAs, depending on the account type chosen.	– Complex setup and administrative requirements. – Increased risk due to alternative investments. – Possible IRS scrutiny and compliance issues. – Certain prohibited transactions and disqualified persons. – Early withdrawals before age 59 ½ may incur a 10% penalty and income tax.
Inherited IRA	– Allows beneficiaries to stretch distributions over their lifetime, potentially extending tax advantages. – Provides the opportunity to continue tax-deferred or tax-free growth of inherited assets.	– Distribution rules vary based on the beneficiary’s relationship to the original account owner. – Tax implications for non-spousal beneficiaries may require distributions within a specific timeframe.

What is the Best Platform for Your IRA?

In summary, choosing the best platform for your IRA depends on several factors, including your preference for active vs. passive investing, your desire for additional services like robo-advising, and how much you’re willing to pay in fees.

Regardless of your platform, the most important thing is to start saving for retirement as early as possible and contribute regularly to take full advantage of the tax benefits offered by IRAs. As always, consider seeking advice from a financial advisor before making any investment decisions.