Where to open a Roth IRA account?

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I recently opened a Roth IRA account. But the decision making process wasn’t an easy one! Here’s how I went about choosing a Roth IRA custodian.

The most fundamental rule of smart investing is to keep taxes and expenses low. A Roth IRA account by its very nature is tax efficient like a 401K. But a Roth contribution limit is less than a 401K contribution limit. In picking a Roth IRA custodian, be mindful of fees. These add up over time.

Criterion 1: Flexible investment option

A Roth IRA is a place to park your money. It could be in the form of CDs, stocks, mutual funds or could be sitting in a money market account. I wanted an account that offered maximum flexibility. Banks are a poor choice; most banks don’t provide brokerage services.

Criterion 2: Choosing a brokerage that’ll be there when I retire!

The first criterion ruled out banks. That left me with brokerage firms. But which one? There are so many of them and all of them offer Roth IRA accounts. Some offer free trades but have other gotchas like minimum requirements and annual fees and questionable reputation. I decided to tune out these even though a promise of free trades was alluring. That left me with the big three – Vanguard, Fidelity and Schwab. (There are others, but I restricted myself to these big ‘uns).

Criterion 3: Keeping expenses low

All three brokerages have a solid reputation and you really can’t go wrong with either one of them.  To pick one from this list, my final criterion was expenses.

Vanguard

My first preference was Vanguard. If I were to trade only with Vanguard mutual funds, that would be my obvious choice.
Here’s Vanguard’s fee structure (I picked out the ones I was more interested in):

  • Annual Fee: $25 for each Vanguard fund in your account. Ouch! Waived if you sign up to receive your documents electronically.
  • Trading Commission (Online): $25 or $0.025 per share, whichever is greater.
  • Minimum Initial Contribution: $3000
  • More Info:
    1. Vanguard Fees & Commissions I
    2. Vanguard Fees & Commissions II
    3. Vanguard Fees & Commissions III

Schwab

Schwab recently reduced their commissions to $8.95 per trade and waived fees for their ETFs. Their ETFs have one of the lowest expense ratios and seemed like a good bet.

Fidelity

Fidelity, in a tit-for-tat move, reduced their commissions as well to $7.95 and waived fees for 25 iShares ETFs.  Blackrock owns iShares and  is the world’s leading ETF provider with a wide mix of ETFs both domestic and international.

What I chose

Even though my asset allocation has a considerable Vanguard tilt, I decided on not going to Vanguard since the trade commissions are quite hefty even to trade on Vanguard’s own ETFs.

Schwab is enticing potential investors with its commission free ETF trading. But Schwab’s ETFs are relatively new and they have as of this post, only 8 ETFs. On the upside, their expense ratios are as good or better than Vanguard’s.

I decided to go with Fidelity. Mainly for their iShares offering. Mind you, they don’t offer all iShares commission-free. Only 25 iShares. But the most common ones.  Fidelity also has some good mutual fund offerings, but to simplify things, I’ll stick with Vanguard (mostly) for fund selection.

No matter who you choose for your Roth, make sure there are no annual fees and other hidden charges.  Roth IRAs are long term investment vehicles, annual fees add up pretty quickly eating away your investment funds.  A $30 annual fee paid for 30 years could eat away as much as $5000 when compounded at 9%!

Think about it like this, when you pay a your first $30 annual fee, you are actually paying over $440 from your retirement fund when you retire(at 9% rate, 30 years)!  Keep this in mind when choosing a Roth IRA custodian that charges annual fees.

An IRA should be a part of one’s personal financial plan. Pick the right custodian with your long term goals in mind.

One thought on “Where to open a Roth IRA account?

  1. It’s a no-brainer to start a Roth IRA account if you can, because taxes are only going one way in this country. Up. So save $200 a month in a low cost Roth IRA account and you will be grateful in 25 to 30 yrs when you retire. Also. don’t forget while Roth IRA’s are only tax free at withdrawal from a federal perspective. You still have to pay state tazes.

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