Where to open a Roth IRA account?

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. 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.

  • Annual Fee: $0
  • Trading Commission (Online): $8.95
  • Minimum Initial Contribution: $1000 or $100 automatic monthly transfer
  • More Info:
    1. Schwab Fees & Commissions
    2. Charles Schwab Pricing Guide (pdf)

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.

  • Annual Fee: $0
  • Trading Commission (Online): $7.95
  • Minimum Initial Contribution: $2,500 or $200 per month (or $600 per quarter)
  • More Info:
    1. Fidelity Roth IRA Account Minimum (see bottom foot note)
    2. Fidelity Fees & Commissions I
    3. Fidelity Fees & Commissions II (pdf)

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.

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