An individual retirement account (IRA) is an investment vehicle to hold your investments. If your IRA is the “vehicle,” then your investments are the “passengers.”
The IRA holds your investments and shelters them from taxes while providing other benefits.
Because IRA accounts offer such significant tax savings (in the long run), they’re a savings vehicle that nearly every investor should consider.
7 Best IRA Accounts of 2023
Here are the 7 best IRA accounts of 2023:
- 🏆 Ally Invest: Best Overall
- Betterment: Best Robo-Advisor
- Fidelity: Best for Hands-On
- Charles Schwab: Best for Customer Support
- Vanguard: Best for Low Cost
- Wealthfront: Best for Beginner Investors
- TD Ameritrade: Best for Commission Free Trading
Many people prefer a “set it and forget it” approach to investing where they can invest in a handful of funds and allow their money to grow over the decades.
But if you prefer a more active approach, Ally Invest is a great choice because they recently joined the club of investment firms offering commission-free stock and ETF trades.
Ally has become a big name in recent years, and justifiably so. Many of their accounts have no minimum to open, and their IRAs are no exception. And you’ll be able to invest in stocks and funds from popular firms such as Vanguard and iShares.
As an added bonus, Ally offers IRA savings and IRA CDs, which have competitive APYs.
Ally Invest is a great choice for active investors. With many different account options offering no minimum to open, you can't go wrong with Ally.
If you prefer to keep things simpler with a more hands-off approach, Betterment is probably worth considering.
When you invest with Betterment, all you have to do is determine your risk tolerance, and Betterment will handle the rest. You also have the option to manually specify what percentage of stocks/bonds you want to keep in your portfolio.
Then, Betterment will invest your money in a comprehensive portfolio that covers the entire market. They’ll also automatically rebalance your portfolio, so you don’t have to worry about it getting out of whack.
There is a fee for all these conveniences – you’ll pay a 0.25% management fee in addition to expense ratios on their funds. Still, there aren’t any investment firms that have a lower fee for this type of service.
No matter your investing experience, Betterment offers a robust and easy to use platform to help you grow your money.
Fidelity recently announced commission-free trades, which is huge for IRA accounts. One of the best things about IRAs is that you control the investments, so not having to pay fees if you happen to change strategies is a big win for IRA accounts.
Fidelity isn’t the only one to recently introduce commission-free trades – Schwab, Vanguard, and others are doing it as well. But Fidelity has other features that make it stand out.
Fidelity’s website is also much easier to navigate than the somewhat antiquated Vanguard site. Plus, they have excellent customer support, including physical locations if you prefer to meet with someone in person.
Charles Schwab offers a complete banking experience that can go toe-to-toe with the best of them, even in today’s competitive market.
Their banking, customer support, and investing products are all top-notch. Schwab, too, now offers commission-free trading of stocks and ETFs. Plus, Schwab offers its own ETFs in addition to funds from the other big names in investing.
If you need help with any of your trades, Schwab has excellent 24/7 support. Whether you’re a beginner investor or have a multi-million dollar portfolio, you’ll have the same great experience working with the Schwab support team.
We can’t forget the name that has long been considered the gold standard of investing. Vanguard is still the largest provider of mutual funds due to its immensely popular low-cost, no-load mutual funds.
While many other firms now have attractive offerings of their own, Vanguard remains a strong competitor. And, to stay competitive, Vanguard has an ever-growing list of commission-free stocks and ETFs.
Investing in a Vanguard IRA will give you access to a wide variety of asset classes, including both domestic and international stocks and bonds.
However, one thing to keep in mind is that as good as Vanguard’s funds are, you will only be able to invest in Vanguard funds here. Other names on this list will let you invest elsewhere.
Wealthfront is a great choice for beginner investors who understand the importance of investing early and often, but who need a little more guidance.
It provides automated investing at a low price point – a 0.25% management fee, to be exact. The only thing you’ll need to get started is $500.
Wealthfront will also allow you to set goals and lets you invest in traditional, Roth, and SEP IRAs. You can even roll over old retirement accounts into a Wealthfront IRA.
Wealthfront also automatically rebalances your investments, meaning you really have to do nothing more than invest money in your IRA. Wealthfront does the rest.
If you’re among the ranks of those expecting commission-free trading, TD Ameritrade won’t disappoint you with what it offers.
TD already offers hundreds of commission-free ETFs from iShares, Invesco, and more. You can also trade stocks and options commission-free. You’ll also have access to more than 13,000 mutual funds, so it suffices to say they have all the funds you could ever want.
In addition to all these, TD has a variety of tools and calculators to help you plan your retirement strategy. This includes the FeeX fee analyzer, which can help spot costly fees on your old retirement accounts. These benefits and more make TD a great place to invest your IRA.
How Do You Choose an IRA?
Choosing your IRA account is separate from selecting your investments. When you invest your money, certain principles are universal, such as keeping your expense ratios and management fees low.
However, choosing an IRA account is a little less straightforward because each one has advantages and disadvantages.
It also depends on your investing strategy: will you be an active investor or more of a passive investor?
Several firms have commission-free trading nowadays, but some still do not. Similarly, with some IRA accounts, you will have very comprehensive customer support; with others, assistance may be less exhaustive.
Also, depending on the type of investment vehicle you choose, there may or may not be management fees. Robo-advisors, for example, charge management fees in addition to expense ratios levied on the funds.
In summary, here are some things you should be considering when choosing an IRA:
- Trading fees
- Management fees
- Expense ratios
- Customer support
Chances are, you won’t find an investment that is perfect in every area, so you will need to determine what is most important to you.
How Do I Open an IRA?
Opening an IRA is very easy. Simply head to the website for your preferred investment broker, fill out a few questions, and you’ll be ready to start funding your account. You can either fund them manually or even use a payroll deduction if you find that more convenient.
Yes, it’s that easy. The part that can be more complicated is deciding your investment strategy.
What Are the Benefits of an IRA?
The main benefit of an IRA are the tax advantages. With a traditional IRA, contributions are tax-free, but withdrawals are taxed as income. With a Roth IRA, the opposite is true.
With both types of IRA accounts, your money grows tax-free – this is the single biggest advantage of an IRA. If you have a taxable account with investments, you must pay taxes on your investment income each year. This is not the case with an IRA.
Which Bank Has the Best IRA Rates?
Several online investment firms allow you to invest with no management fees. In such cases, the only fees are the expense ratios of the funds themselves. And, as of late, we are starting to see funds that don’t even have expense ratios – meaning you can invest fee-free.
The low-cost leader in that regard has typically been Vanguard. More recently though, funds such as FZROX from Fidelity allow you to invest with no management fees and no expense ratio, either.
When it comes to your local bank, the reality is that they probably don’t offer the best rates for IRA accounts. The reason for this is that they do not typically offer investment options such as ETFs and mutual funds. Instead, they might offer a certificate of deposit (CD).
A CD is a savings account with a fixed, guaranteed rate of return and maturity date, which is determined when you open the CD. While these accounts offer a guaranteed return, the return will be much lower than you would get with investing in stocks.
As of June 2020, the average rate for a 5-year CD is around 1.00%. Meanwhile, using this data, we see a long-term average return of 11.4% for the S&P 500. Although there are many negative years, the long term is significantly better than a CD.
How Easily Can I Access That Money?
Money invested in an IRA isn’t always easy to access. As a general rule, you must be age 59 & 1/2 to be able to withdraw money. Technically you can withdraw money before that, but if you do, you may be subject to a 10% penalty.
And the penalty is even more painful with traditional IRAs. That’s because traditional IRAs are taxed as income when taking distributions, meaning you’ll pay a 10% penalty in addition to the income tax before age 59 & 1/2.
That hefty penalty means withdrawing money early isn’t usually worth considering. Of course, the penalty is intended to protect you; without it, you might be too tempted to withdraw money at will. And depleting your retirement savings too early could be disastrous.
But there is one big exception to this rule.
That exception comes with Roth IRA accounts. With a Roth IRA, there is no penalty on money that has been invested for five years or longer (or age 59 & 1/2). If you meet either criterion, you won’t have to pay the penalty on distributions from a Roth.
Can You Lose All Your Money in an IRA?
In theory, it is possible to lose all your money in an IRA; in practice, it’s a bit less likely. If you were to put all of your IRA investment into one or two penny stocks, for example, you could certainly lose all your money. However, if you put together a well-rounded portfolio, you can lose some money, but it’s unlikely you would lose all of it.
Even during the Great Depression – the worst stock market crash in history – you wouldn’t have lost all of your money. Sure, you would have lost roughly 90 percent of it, but the market has recovered many times over since then.
What’s most important is choosing a broadly-diversified portfolio with low expenses across the board. For instance, total-market index funds represent the total US market – over 3600 companies – and many of them have expense ratios under 0.1%. It’s tough to lose all your money with a portfolio like that!
Am I Eligible To Save On Taxes With An IRA?
Most investors are eligible to save on taxes with an IRA, although there are some exceptions. For example, if you have a retirement plan with your employer and a traditional IRA, your tax deduction may be limited if your income is too high. The same is true if any of these criteria apply to your spouse.
For single people, you are eligible for a full deduction if you make $64,000 or less; the figure for married couples is $103,000.
Roth IRAs are not tax-deductible.
What Is the IRA Contribution Limit?
The IRA contribution limit changed in 2019. The limit, as of 2019, is $6,000. The catch-up contribution limit (for those aged 50 and over) is $7,000. These limits include both Roth and traditional IRAs. You can have and contribute to both accounts, but you can’t contribute more than $6,000 (or $7,000) between the two per year.
Also of note – you cannot make contributions to a traditional IRA after age 70 & 1/2, but you can make contributions to a Roth, in addition to rollovers from a 401k or other retirement account.
What Do You Mean by Invest the Account?
Opening an IRA account doesn’t mean you automatically have investments. Depending on the investment firm, some will move the money into a federal money-market fund; others will simply leave the money in cash. It isn’t until you use that money to fund an investment portfolio that you are actually invested.
What Is the Difference Between a Traditional IRA and a Roth IRA?
There are a few key differences:
- Traditional IRA Contributions: With a traditional IRA, contributions are tax-free, but withdrawals are taxed as income.
- Roth IRA Contributions: With a Roth IRA, contributions are taxed, but withdrawals are tax-free.
- Traditional IRA Distributions: With a traditional IRA, you must begin taking distributions beginning at age 70 &1/2.
- Roth IRA Distributions: With a Roth, there is no minimum required distribution for the account owner, though there is for beneficiaries.
- Traditional IRA Withdrawals: There will always be a penalty if you withdraw money early from a traditional IRA.
- Roth IRA Withdrawals: With a Roth IRA, you may withdraw contributions at any time with no penalty (but not earnings).
- With a Roth IRA, you may make withdrawals before age 59 & 1/2 of money that was contributed at least five years ago. There is no such rule for traditional IRAs.
So, Where Is the Best Place to Open an IRA Account?
The best place to open an IRA account is with whichever online investment firm you prefer.
It is generally a better idea to open an IRA online rather than through your local bank or credit union.
That’s because these online investment firms will offer you the best investment options on the market at the best rates possible.