If you don't have access to a 401(k) retirement account through your workplace, the next best thing may be an IRA. Standing for individual retirement account, an IRA is a tax-advantaged account that lets you put money aside for the future. But while opening an IRA can be a smart financial decision, selecting the right provider can feel overwhelming.
The best IRA accounts are those with low fees and diverse investment options. Here are seven options to consider:
— Charles Schwab.
— American Funds.
— Northwestern Mutual.
— Equity Trust Company.
Keep reading for details on who offers IRAs, how to choose a provider and which firms offer the best IRA accounts.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Best IRA Account Providers
To open an IRA, you need a custodian. The IRA custodian is a financial institution that holds the money for you and ensures all IRS regulations are met. A bank, brokerage firm or insurance company can all serve as an IRA custodian.
"You can also go direct to a mutual fund," says Kristian Finfrock, financial planner and founder of Retirement Income Strategies which has four locations in Wisconsin.
The following providers represent a cross-section of these IRA custodian options.
Fidelity gets high marks for its broad range of financial products and options and long history of service. In addition to IRAs, the company administers 401(k) accounts, brokerage accounts, 529 college savings plans and more. All that has helped Fidelity assemble an impressive collection of financial planning tools that can benefit IRA holders. Plus, Fidelity operates branches across the country for those who want face-to-face service.
The company offers access to more than 10,000 mutual funds, including many with no fees. There is no minimum balance, opening fee or annual cost to open a traditional or Roth IRA at Fidelity, assuming you choose and manage your own investments.
With a Fidelity Go IRA, the company will choose and manage investments based on your goals and risk tolerance. This service is offered free for accounts with less than $10,000 deposited. For those with balances of $10,000-$49,999, there is a $3 per month fee, and accounts holding $50,000 or more are charged 0.35% per year.
Charles Schwab also excels at offering customers access to personalized advice. It provides 24/7 professional guidance and a number of online tools and resources. For those who want to meet with an advisor in person, Charles Schwab has a network of storefront locations throughout the country.
A Schwab IRA can be opened with any amount since there is no minimum balance requirement, and there are no fees to open and maintain the account. Plus, the firm provides access to funds that can be traded online at no charge.
Given its strong reputation and diverse offerings, many finance professionals trust Charles Schwab with their clients' money. For instance, Mason Williams, managing director and chief investment officer at Coral Gables Trust Company in Coral Gables, Florida, says his firm uses Schwab as the custodian for client IRAs.
This mutual fund company can be a good choice for cost-conscious consumers. "Vanguard is a very low-cost option," Finfrock says. On its website, the company notes its average expense ratios are 0.09%, which is 83% lower than the industry average.
What's more, Vanguard funds tend to outperform their peers. According to the firm, 81% of its mutual funds and ETFs have performed better than peer-group averages during the past 10 years.
IRA holders get access to target-date funds, which make it simple to invest based on an anticipated retirement age. There are also 200 commission-free Vanguard funds available and no account service fees are assessed when documentation is sent electronically.
[See: 7 Best Vanguard Funds for Retirement.]
If you're comfortable managing your IRA online, try Betterment. The company is a relatively new provider but has quickly made a name for itself as having some of the best IRA accounts for hands-off investors.
As a robo advisor, it recommends a portfolio based on financial needs, but doesn't necessarily offer the same level of nuanced guidance you'd receive from a financial planner or full-service investment firm. However, the company is a fiduciary so you can be assured that the recommendations you do receive are made with your best interests in mind.
"You can do it all online," Williams says. "That's the beauty of some of these startups. They have made it so easy." There is no cost to open an IRA at Betterment, and the company charges an annual fee that is 0.25% of the account balance.
American Funds is one of the largest and oldest mutual fund companies in the country. There are more than 40 mutual funds within the American Funds family, and in addition to IRAs, individual investors can open 529 college savings plans or specialized ABLE accounts, which are intended for those living with a disability.
Low fees and above-average returns are two benefits of American Funds. They also originated the multiple-manager approach to fund management, according to Finfrock. That means three to six people may be overseeing a fund's investments, and this approach ensures a fund's success isn't dependent on any one person.
The only downside with an American Funds IRA is that you can't open an account directly with the company. The firm encourages people to work with a financial advisor who can provide personal assistance.
Northwestern Mutual has a network of more than 6,400 finance professionals nationwide who advise clients on not only IRAs, but also life insurance, college savings, wealth management, estate planning and more. That makes the company a good choice for those seeking comprehensive financial services in one place.
"Somebody is going to come to us and (receive) a more hands-on approach," explains Barry Fies, a wealth management advisor with Northwestern Mutual's Private Client Group. He adds that fees may vary depending on the advisor. "Those fees are going to be reflective of the various services provided."
While Northwestern Mutual advisors open and manage their clients' IRAs, the company uses financial firm Pershing as an account custodian.
Equity Trust Company
Self-directed IRAs offer investors more control and additional investment options for their retirement savings. For instance, these accounts allow people to invest in items not normally included in other accounts, such as real estate, precious metals and tax liens.
Equity Trust Company, also known as ETC, is the largest custodian of self-directed IRAs, according to Finfrock. Accounts can be opened online with a one-time setup fee of $50. After that, the company charges an annual maintenance fee based on the account balance. This fee starts at $205 for balances less than $15,000 and goes to $2,150 for balances in excess of $2 million.
While self-directed IRAs provide flexibility, investors might need professional help, particularly if they want to include alternative investments in their portfolio. In that case, consulting with an ERISA attorney may be wise to ensure you don't run afoul of any laws, Finfrock says.
Understanding IRA Accounts
While contributions to a traditional IRA are tax-deductible, withdrawals in retirement are subject to income tax. Another option is to open a Roth IRA, which doesn't offer any immediate deduction but does provide tax-free withdrawals in retirement. Up to $6,000 can be contributed to an IRA in 2021, and those age 50 and older can contribute $7,000.
As noted above, IRAs are offered by numerous institutions, from national banks like Citi and Chase to investment firms like Fidelity and Charles Schwab. Plus, a new generation of online investment platforms such as Betterment and Wealthfront cater to those who want a hands-off experience for retirement savings. These new platforms are ideal for do-it-yourself investors who don't feel the need to work one-on-one with a broker. Meanwhile, those who want their account actively managed by a professional may be best served by an IRA set up by a brokerage firm.
IRA money held in a bank deposit account such as a savings account or certificate of deposit is typically insured for up to $250,000 by the Federal Deposit Insurance Corporation. Meanwhile, the Securities Investor Protection Corporation offers up to $500,000 of protection to customers of member brokerage firms.
[Read: A Guide to Your IRA.]
Tips for Finding the Best IRA Account Provider
There are three main factors to consider when selecting an IRA provider: cost, service and investment options.
"When you're just starting out, cost is often most important," Williams says. "When you are more seasoned, service level will probably move to the top."
Some IRAs charge a percentage of the amount invested while others charge a fee per transaction. Per-transaction fees may range from $4.95 to $9.95 for stocks and up to $49.95 for mutual funds. Many companies offer a number of stocks and ETFs that can be traded for free as well. Meanwhile, percentage fees can be as low as 0.25% of an account balance.
When comparing costs, remember that you typically get what you pay for. Low-cost providers offer less personalized service, while one-on-one advice from a planner will come at a premium. That isn't to say a low-cost provider isn't a good choice, but it is one that will be best for people who feel confident in their ability to manage their own retirement account. "It depends on an individual client's level of comfort," Fies explains.
If you're paying more for personalized advice, understand what motivates a company's recommendations. Not all IRA advisors are fiduciaries. That means they are not legally required to work in your best interest and could try to steer you into investments that result in larger sales commissions.
To help people make investment decisions, some IRA providers give customers a variety of tools such as calculators, investment webinars and research reports. However, consumers need to be wise about how they use that information too. For instance, they may lead an investor to move money frequently between funds and pay unnecessary fees when it could be better to simply leave money untouched.
In the end, though, no factor is more important to selecting an IRA provider than its investment choices. "It doesn't make sense to pay for a premium service if doesn't have the funds you need," Williams says.
In other words, if an IRA doesn't provide access to high-performing investment funds, a low fee doesn't benefit you. Instead of choosing an IRA provider based on cost alone, consider what funds are available and how they have performed.