A Roth IRA account is an account that provides not only tax-free growth of your hard-earned savings, but allows for anytime tax- and penalty-free distributions as well (only for contributions.) In addition, a Roth IRA gives you a much more flexibility over your funds and investment options, which can improve your overall performance and speed-up the accumulation process. For instance, you can construct your portfolio the way you want, not the way your 401k plan management company wants, by investing your funds in low-cost index ETFs, stocks, and even derivatives. The ending benefit – potential avoidance of the negative effect of high fees on your account and possibility to dramatically improve your performance. This investment flexibility combined with tax-free growth and distributions makes this retirement account so valuable and powerful.
However, do not rush to open the account yet. Opening a Roth IRA account makes sense only if you are currently in a low-income tax bracket and expect that your income and tax rate will be significantly higher in the future and by the time you retire. If you think this is your case, then you might consider opening a Roth IRA. But with numerous options, the next question is where to open it and this where things can get a little bit complicated.
In this post, I will outline the best brokers to open a Roth IRA account. I divided investors into three groups:
- Active investors are investors who frequently trade stocks or other investment vehicles, holding their positions from a few days to a few months
- Passive investors are investors who hold their positions for years, making adjustments only at specific and major life milestones. Investment portfolios of passive investors are composed mostly of individual stocks and sometimes of ETFs and mutual funds
- Index investors are investors whose portfolios are composed primarily of low-cost index ETFs or mutual funds and well-diversified
Criteria that I used to analyze brokers are the following:
- Account minimum
- Account maintenance fee
- Commission per 1 trade
- Availability of commission-free ETFs and mutual funds
- Account transfer or closeout fees
Best Brokers for Active Investors
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $4.95
- Commission on Mutual Funds: $20
- Commission-free ETFs: No
- Transfer or Closeout Fee: $60
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $4.95
- Commission on Mutual Funds: $9.95
- Commission-free ETFs: No
- Transfer or Closeout Fee: $50
- Account Minimum: $5,000
- Account Maintenance Fee: $10 per month activity fee + $7.5 per quarter charged by trustee. $10 fee is waived for the accounts greater than $100,000
- Commissions on Stocks and ETFs: $0.005 per share, min $1
- Commission on Mutual Funds: $14.95
- Commission-free ETFs: 40 free ETFs
- Transfer or Closeout Fee: $0
My choice: Even though Interactive Brokers has been ranked as the best online broker for the four consecutive years and has the lowest trading fees on the market, unfortunately for active Roth IRA investors it is not the best option. High account maintenance fees will significantly affect account performance and may eat up a big portion of potential returns. My preferred choice in this category is OptionsHouse.
Although OptionsHouse has a much higher mutual funds commissions and a higher closeout fee, commissions on stocks and ETFs are the same as with the TradeKing, $4.95 with no account minimums and maintenance fees. Low trading fees is second to none factor for active investors. Besides that, OptionsHouse has a great, intuitive trading platform and I am sure that the recent merger with TradeMonster will only make the company better.
Best Brokers for Passive Investors
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $6.95. If you maintain total combined balances of $25,000+ in Bank of America deposit accounts (savings, checking, or CDs), or $25,000 in Merrill Edge self-directed brokerage account, you can qualify for up to 30 $0 trades per each calendar month
- Commission on Mutual Funds: 600+ free mutual funds. Otherwise $19.95
- Commission-free ETFs: No
- Transfer or Closeout Fee: $49.95
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $6.95 or $3.95 via the Sharebuilder Plan (automatic investing on a recurring basis or one-time purchases every Tuesday)
- Commission on Mutual Funds: 400+ free mutual funds. Otherwise $19.95
- Commission-free ETFs: No
- Transfer or Closeout Fee: $75
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $7
- Commission on Mutual Funds: 1800+ free mutual funds. Otherwise $17
- Commission-free ETFs: No
- Transfer or Closeout Fee: $75
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $9.99
- Commission on Mutual Funds: 1300+ free mutual funds. Otherwise $17
- Commission-free ETFs: 100+ free ETFs
- Transfer or Closeout Fee: $75
My choice: For a long time I was convinced that there is nothing better for passive investors than Scottrade. It has a great customer service, more than 500 branches across the country, and pretty affordable pricing. However, the lack of different qualifications program for free trades was something that didn’t give me peace of mind. As I mentioned, $7 per transaction is actually a very affordable price, but for accounts with low balances it still can be too high. That is why I choose Merrill Edge in this category. Merrill Edge trading fees are just 5 cents lower than Scottrade’s and definitely not an advantage. However, they offer their customers 30 free trades per month if a client maintains total combined balances of $25,000 either in Bank of America deposit accounts or in Merrill Edge self-directed brokerage. Besides said, Merrill Edge offers:
- Great research tools, including Bank of America and Merrill Lynch reports
- Local, one-on-one advice in over 1,000 brick-and-mortar branches
- Variety of planning tools and education, including educational content from Kahn Academy
A few words about E-Trade and Capital One Investing. The reason I decided to include E-Trade is because it offers a huge variety of commission-free mutual funds, plus over 100 commission-free ETFs. Their trading fees are high, but if you are going to focus on a core-satellite approach, where the biggest portion of your portfolio is going to be invested in mutual or exchange-traded funds and the rest in stocks/options, then choosing E-Trade may be a good option.
As per Capital One Investing, the reason for the company to be in my list is the possibility to dramatically decrease trading fees from $6.95 to $3.95 by simply setting up the ShareBuilder Plan. The ShareBuilder Plan is a way to buy stocks/ETFs by specifying a dollar amount to invest (as little as $5) and selecting a frequency (every 1st Tuesday, 2nd, 3rd, 4th, Tuesday weekly, bi-weekly, or monthly) you are comfortable with. I am a big proponent of regular contributions of any amount and Capital One Investing even rewards its customers for doing that. Plus, by purchasing on Tuesdays specified by you, you unwittingly utilize dollar-cost averaging technique, which buys more shares when prices are low and fewer when prices are high.
Best Brokers for Index Investors
- Account Minimum: $1,000 (waived with automatic $100 monthly deposits)
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $8.95
- Commission on Mutual Funds: $0 for Mutual Fund OneSource Funds (174 funds). Otherwise $76 per buy and $0 per sell
- Commission-free ETFs: 200+ free ETFs via Schwab ETF OneSource
- Transfer or Closeout Fee: $0
- Account Minimum: $1,000 for Target Retirement Funds and STAR Fund (traditional portfolio: 60% in stocks and 40% in bonds). For all other funds, a $3,000 minimum is applied
- Account Maintenance Fee: $0 with sign up for e-delivery. Otherwise, $20 annually
- Commissions on Stocks and ETFs: Depends on the account balance. Having a balance less than $50,000 will cost you $20 for stocks and non-Vanguard ETFs per trade
- Commission on Mutual Funds: Free for Vanguard funds. Otherwise $35
- Commission-free ETFs: Free for Vanguard ETFs
- Transfer or Closeout Fee: N/A
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $9.99
- Commission on Mutual Funds: 450+ free mutual funds. Otherwise $49.99
- Commission-free ETFs: 100+ free ETFs
- Transfer or Closeout Fee: $75
- Account Minimum: $0
- Account Maintenance Fee: $0
- Commissions on Stocks and ETFs: $7.95
- Commission on Mutual Funds: Free for Fidelity funds. Otherwise $49.95
- Commission-free ETFs: 84 free ETFs
- Transfer or Closeout Fee: $50
My choice: If you are hard believer in market efficiency and think that no one can beat the market on a consistent basis then low-cost index ETFs or mutual funds are probably the best way to go. With all due respect to Vanguard, I’ve come to a conclusion that it is not the best place for a Roth IRA account. Their low-cost ETFs and mutual funds are probably the best on the market and I personally utilize some of them for my personal and client accounts, but the company requires an initial balance of $1,000 for Target Retirement Funds and STAR Funds and $3,000 for all other funds, which might be an issue for newbie investors. Besides that, in case you decided to invest in non-Vanguard ETF or mutual fund, the commission you will have to pay is going to be very high, $20 (decreases with an account balance growth.)
Among the rest mutual fund companies, my choice falls on Schwab. Why? Because it has a huge variety of commission-free ETFs (200+ vs. 100+ in TD Ameritrade and 84 in Fidelity) from 13 ETF providers and 66 Morningstar categories. I’ve found a lot of Schwab ETFs that are similar to Vanguard and have approximately the same or even cheaper. Even though TD Ameritrade and Fidelity require $0 to open an account, Schwab’s $1,000 minimum account balance can be waived with $100 monthly contributions. This is again a great incentive to motivate people invest on a regular basis. As per non-Schwab commission-free ETFs and stocks, their commission is $1 higher that Fidelity, but not as high as Vanguard or TD Ameritrade, which places it somewhere in the middle commission-wise.
Conclusion
As you can see, there are a lot of brokers to choose from. Some are more appropriate for active investors, while others for passive and index investor. The final decision, of course, is up to you. As a general guideline, make sure to completely understand your investment philosophy, investment style, and, more importantly, fees you are willing and going to pay. Remember that fees are probably going to be the biggest drag on your portfolio and you want to limit them as much as you can.
If you think that I missed some brokers, please feel to leave a comment below.
Disclosure: Long IBKR on personal and clients accounts.
Merrill Edge gets my vote, with Scottrade coming in second. Those free trades, which by the way, go up to a max of 100 free ones per month (depending on balances in accounts), make a world of difference as you go thru the year and buy/sell. Personally, I have saved roughly $1,400 this year – with the Merrill free trades, versus what I would have paid Scottrade.
Wow, $1,400, unbelievable. I’d go with Merrill first as well, nice platform, free trades, great research. My second preference probably either TD or Optionshouse, depending on the goals.