How to Choose an IRA Provider

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If you're ready to begin funding your retirement, you may not know exactly where to start. Often the best option is an employer-sponsored program such as a 401(k) plan or, if you work for a nonprofit organization or government agency, a 403(b) plan. These plans are a great way to save for retirement because employers typically match some or all of your contributions, accelerating the rate at which you can accumulate savings.

If you don't have an employer-sponsored savings plan, or if you're fortunate enough to have maxed out your annual 401(k) or 403(b) savings limit, you may want to set up an individual retirement account (IRA) on your own to further your retirement savings goals.

Like a 401(k) or 403(b), an IRA is an account you can use to set aside savings for use in retirement, typically with some tax advantages. Money you place in an IRA can be invested in any number of ways, via options that vary by account type and provider.

You can set up IRAs through many banks, credit unions and investment brokerages, and the range of offerings can be bewildering. Here's an overview of what to consider when comparing IRA providers, and settling on one that'll meet your needs and investment style.

Is a Traditional or Roth IRA Best?

The first step in choosing an IRA provider is to decide whether you prefer a traditional IRA, in which your savings are invested on a pretax basis, or a Roth IRA, in which your contributions are made after you've paid taxes on them. As of 2020, both types of accounts allow a maximum annual contribution of $6,000, or $7,000 if you're 50 or older. They differ in the following ways:

  • With a traditional IRA, money you set aside in the fund (along with any investment returns that accumulate) is exempt from federal income tax until you withdraw it. You'll pay a 10% tax penalty on any funds you withdraw before you reach the age of 59½, and you must start withdrawing from the fund, and paying taxes on the proceeds, by age 72.
  • With a Roth IRA, contributions are made using post-tax dollars, meaning you cannot take the contributions as deductions on your federal income tax return. But your contributions to the fund and any accumulated investment growth are not considered income (or subject to income tax) when you withdraw them. As with a traditional IRA, there are penalties for withdrawal before age 59½; but in contrast to a traditional IRA, withdrawals from a Roth IRA are never mandatory. There's no age at which you must start withdrawing Roth IRA funds, and you can even leave the full contents of a Roth IRA to your heirs.

Choosing between a traditional IRA and a Roth IRA often comes down to a tax preference. Certain people, particularly high earners, choose a traditional IRA because they assume that their income will be lower in retirement, and they prefer to use their pre-tax IRA contributions to reduce their taxable income now. Others, especially those just starting out, may prefer a Roth because they expect to pay higher taxes later in life. They may also prefer the flexibility of being able to withdraw or not withdraw the funds anytime after age 59½ (as long as they've had the fund for at least five years) or the ability to use Roth savings for educational and certain other expenses without penalty.

How to Find an IRA Provider That Suits Your Style

If you're not clear on whether a traditional or Roth IRA is better for you, you can make that part of the conversation when you start auditioning potential IRA providers. Many providers offer both types of funds, and company representatives should be able to help you clarify your preference.

Other considerations you should bear in mind when talking with the provider include the following:

  • Approach to risk: The first thing any good investment planner explores with a new client is tolerance for risk. No investments are guaranteed, and it's always possible to lose money if securities or industries you've invested in take a financial hit. But some investment vehicles pose greater risk (and potential for higher returns) than others. If you're comfortable with making bolder investments in pursuit of bigger gains, certain IRAs with more aggressive investment funds—and fund managers—will better suit your approach. Other offerings (and investment advisors) will be more appropriate for risk-averse investors. Ask about each provider's portfolio offerings and how they align with your approach to investment risk.
  • Desire for investment guidance: If you consider yourself a savvy investor and are comfortable managing your investments yourself, you can opt for a fund with a do-it-yourself approach that lets you allocate your savings among mutual funds, stocks, bonds and other investment instruments yourself. If you'd prefer to have a professional portfolio manager handle your investments for you, you can find IRA providers that offer that service as well. There are also funds managed by algorithms that fall somewhere in the middle, with a goal of expanding your holdings through fairly aggressive (and relatively risky) investment vehicles early in your career, and shifting to safer, more conservative vehicles as you approach retirement age, to protect the wealth you've accumulated.
  • Customer service options: Even the most sophisticated investor will occasionally have a question or require some assistance from their IRA provider, and those with less experience may have need for regular consultations with the experts. It's important to understand and feel comfortable with the ways your IRA provider delivers help. Some offer access to a contact person you'll work with consistently every time you need a hand; others provide live phone assistance, but use a pool of representatives who can call up your account and answer relevant questions; and still others use live text chat or email to answer your questions.
  • Fees: All IRA providers charge fees, but the way they are structured, and how they relate to their fund management and customer service offerings, can vary considerably. Some charge flat annual fees, some charge for each transaction or trade, and others offer a limited number of free customer service calls per year and charge for any additional contact. Make sure you investigate the fees that apply at each IRA provider you're considering, and look for a good fit for the way you expect to use the provider's services.

Open Your Account

Once you've settled on an IRA provider and service offering, you can set up an account yourself within a few minutes. Many accounts can be opened with a zero balance, but some require minimum initial contributions of a few hundred dollars. In addition, certain IRA mutual funds have minimum buy-in requirements as high as $1,000. In that case, you could open your IRA account with a smaller contribution, but wouldn't be able to invest in the fund(s) until you accumulate enough to meet their minimum buy-in requirements.

An IRA is a great vehicle for accumulating and growing retirement savings, and identifying the right IRA provider can be the first step on a prudent financial path. Do plenty of research, ask lots of questions, and when you find a provider that addresses your concerns and reflects your investment priorities and style, and you'll be on your way to solid retirement savings.

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