Best Roth IRA Accounts

Roth IRA accounts enable you to invest for your retirement years in a tax-efficient manner and should be considered when you start retirement planning or looking to boost your retirement savings.

In this guide, I explain the fundamentals of how these retirement accounts work and which of the best Roth IRA accounts and providers are worth considering, in terms of supported assets and low account fees.

Top Roth IRA Accounts at a glance

• Interactive Brokers
• Robinhood
• Tradestation
• Fidelity Investments
• SoFi

Where should I invest my Roth IRA?

With that said, I found that there are dozens of online brokers that support Roth IRA accounts, so knowing which provider to sign up with can be a challenging task.

In this section, I discuss some of the key factors to consider when searching for a suitable Roth IRA account.

Supported assets

The first metric to explore when selecting a Roth IRA broker is the type of assets available. This should mirror your long-term financial goals and tolerance for risk.

I found that most US brokers will offer access to thousands of stocks and ETFs from the NASDAQ and NYSE – usually on a commission-free basis.

If you seek access to international equities from international exchanges, make sure that the respective broker supports this.

In addition to stocks and ETFs, many Roth IRAs offer access to mutual funds. This option is suitable for those that prefer a more passive approach to investing. This is also the case with bonds.

Some online brokers now support cryptocurrency investments in a Roth IRA, but do tread with caution in this regard – considering how speculative this industry is.

Self-directed or managed Roth IRAs

You should also assess whether you wish to choose your own investments via a self-directed Roth IRA account, or if you prefer having your funds managed on your behalf.

By opting for a self-directed account, you will have full control over your investment decisions. Not only in terms of the chosen assets but when to buy or sell.

Some online brokers, such as Fidelity and SoFi, also offer the option of managed Roth IRAs. You will initially be required to state your investing goals and risk appetite, and the chosen broker will build your Roth IRA portfolio automatically.

The portfolio will be rebalanced and maintained regularly, which offers a completely passive experience.

Fees

Another important aspect to consider when browsing the best Roth IRA accounts is what fees you will be expected to pay.

I found that the main fee types to consider are as follows:

Payments

Most online brokers enable you to deposit funds into the Roth IRA account on a fee-free basis. However, this isn’t always the case – especially when opting for a wire transfer.

Trading commissions

The vast majority of brokers now support 0% commission trading on US-listed stocks and ETFs.

However, trading commissions might be charged on certain assets, such as bonds and mutual funds. Make sure that the fees are competitive on your preferred assets and markets before proceeding.

Annual Roth IRA fees

I also found that some of the best Roth IRA accounts attract an annual fee, which is oftentimes not clearly displayed by the broker.

For example, TradeStation charges $35 per year on Roth IRAs. While this might be insignificant on larger balances, causal investors might find this makes the process unviable.

Fund fees

By investing in mutual funds, ETFs, or index funds – additional fees may apply. You might be required to pay a one off charge for each purchase made and/or an annual expense ratio.

These fees will need to be factored into your long-term portfolio goals, especially if you are investing small amounts.

SIPC protection

It is important to only select a Roth IRA account that comes with SIPC coverage.

This means that in the unlikely event of a brokerage collapse, the account is protected by up to $500k. This is inclusive of US dollar cash balances of up to $250k.

Account minimums

Causal investors will also need to consider the minimum account balance when selecting a Roth IRA.

Many of the brokers I came across do not have a minimum deposit in place, so you can usually get started with any amount of your choosing.

User-friendliness

Some Roth IRAs are more suitable for seasoned traders, while others are tailored to the absolute beginner.

For example, the likes of Robinhood and SoFi are ideal for investors with little to no previous experience in trading. Not only in terms of the platform interface, but account and trade minimums.

IBKR is perhaps more suitable for seasoned investors that seek high-level trading features and analysis tools. IBKR also supports margin trading via its Roth IRAs.

What is a good portfolio for a Roth IRA?

There is no right or wrong strategy in this regard, as it all depends on your financial goals, tolerance for risk, and in many ways – your age.

Stock index funds

Many industry commentators will argue that the average investor saving for their retirement via a Roth IRA should focus on conventional stock index funds.

• The most common index fund in this regard is the S&P 500.
• This index fund tracks 500 large-cap stocks from the US markets.
• The index fund is rebalanced every three months to ensure that it remains aligned with the broader US stock market.
• Crucially, the S&P 500 has generated average annualized gains of approximately 10% since its inception.
• This historical return is based on a reinvestment of dividends, with most S&P 500 index funds making a distribution every three months.

Ultimately, the S&P 500 enables you to invest in the wider US economy in a passive manner.

Other popular funds that are compatible with Roth IRAs include the Dow Jones and the Total Stock Market Index.

Dividend funds

All Roth IRAs should represent a diversified portfolio to ensure that you are not over-exposed to a small number of markets.

Dividend funds are another option here, especially for those that seek predictable income. There are a range of funds that specifically focus on dividend aristocrats. These are companies that have increased the size of their dividend for at least 25 consecutive years.

Some dividend funds make a distribution every month, which is ideal for compounding the value of your Roth IRA portfolio.

Individual stocks

If you have some prior experience in the equities market, Roth IRAs also enable you to invest in individual stocks. This option comes with both pros and cons.

On the one hand, individual stocks do offer a higher upside when compared to index funds – especially those in high-growth industries.

However, this strategy also comes with additional risk, especially if you do not have the required skill set to make informed investment decisions.

Moreover, you will need to be a lot more active when buying and selling individual stocks for your Roth IRA, as you will need to dedicate sufficient time to research the market.

Cryptocurrency

Although returns in recent years have been phenomenal, cryptocurrencies are a speculative and high-risk asset class. As such, allocating funds from your Roth IRA in cryptocurrencies like Bitcoin and Ethereum is certainly not the most risk-averse move.

For this reason, only a select number of online brokers enable you to add cryptocurrencies to a Roth IRA.

Nonetheless, if this is something that does interest you, it may be best to keep your stakes to an absolute minimum. In most cases, industry commentators suggest capping high-risk investments to no more than 5% of the overall portfolio.

Other assets

In addition to the above, I also found that mutual funds are popular with some investors when building a Roth IRA portfolio.

Although there will be additional fees, mutual funds will take care of the end-to-end investment process. This means that you won’t need to select individual assets for your Roth IRA or attempt to time the market in any way.

Other asset classes that may be considered for your Roth IRA include fixed-rate bonds, IPOs, commodities, and ETFs that offer access to the international markets.

Balancing risk based on age

Some investors will take a risk-based approach when building a Roth IRA that is dependent on their age.

For instance, the general rule is that the closer you are to the age of retirement, the less risk you should take when selecting investments.

This means that investors over the age of 50 will likely have a much larger percentage of their portfolio in high-grade bonds. At the other end of the scale, investors in their 20s may consider growth stocks in addition to emerging market ETFs.

With that said, there is no one-size-fits-all rule when it comes to risk. You will need to assess how much risk you personally feel comfortable taking and ultimately, build a Roth IRA portfolio around this.

Is a Roth IRA a good idea right now?

As such, the sooner you get started with a Roth IRA account, the longer you will have to make contributions and thus – the more chance you have of retiring with a suitable nest egg.

However, Roth IRAs are not the only option when it comes to making tax-efficient investments for your retirement pot.

In addition to a Traditional IRA, you might also have access to a 401(k) plan with your employer.

Roth IRA vs Traditional IRA

Both Roth and Traditional IRAs are offered by many online brokers in the US. The option you select will ultimately depend on your current age and whether or not you expect your income to increase in the coming years and/or decades.

It is important that you make the right decision, so here are the key points to factor in when choosing between a Roth and Traditional IRA.

Roth IRA – Key points

The main premise of a Roth IRA is that your money will grow tax-free. This means that when you make withdrawals at the age of retirement, no tax will be applicable.

This is because you will have already had to pay taxes on the original investment, for instance, through your monthly salary. Tax deduction is therefore done at source rather than when you want to withdraw your retirement savings.

A Roth IRA is therefore, generally more suitable for those of you that have time on your side.

This is because, in theory, the value of your capital gains will likely surpass the original investment.

Traditional IRA – Key points

A Traditional IRA will enable you to invest without initially paying any tax on the contribution.

This is because you will have the ability to make tax-dedicated claims on Traditional IRA investments in the respective year that the contributions were made.

You will, however, be taxed on any Traditional IRA withdrawals that are made when you eventually retire.

Traditional IRAs may be more suitable if you believe that you will be on a much lower income tax rate at the age of retirement. In most cases, if you are under the age of 50, a Roth IRA will likely be the best way to go.

What to consider before opening a Roth IRA

Therefore, in this section, I cover some of the most important considerations to make before opening a Roth IRA account.

How much should you put in a Roth IRA to start?

The first consideration to make is the amount of money that you will need to get started with a Roth IRA.

This will be determined by the broker that you open the Roth IRA account with. I found that most online brokers in the US enable you to get started without needing to meet a minimum deposit. In other cases, such as SoFi, the account minimum is just $1.

As such, a Roth IRA is suitable for all investment budgets.

With that being said, a Roth IRA is viable for long-term investment goals, so you should probably spend some time assessing how much you can invest each month.

The earlier that you begin making contributions, the more time your money has to grow. For example, consider that for every $100 invested – based on an average annualized interest rate of 10%, the capital would be worth over $1,700 in 30 years.

Now consider that if you continued to add $100 to the Roth IRA each and every month at the same assumed growth rate, in 30 years time this would be worth nearly $200k.

Of course, there are no guarantees in the investment world, so these figures should be taken with a grain of salt.

What is a good rate for a Roth IRA?

A Roth IRA is not an investment product, rather, they are simply tax efficient accounts offered by online brokers. As such, there is no target rate when considering a Roth IRA.

Instead, the rate of return that you are able to make will ultimately depend on your chosen investments.

The value of your Roth IRA investments can both rise and fall, which is why diversification is so important.

Nonetheless, as I noted earlier, the S&P 500 has averaged 10% per year on an annualized basis since its inception nearly 100 years ago.

Is a Roth IRA good for beginners?

A Roth IRA is suitable for both beginners and experienced investors. The account merely gives you access to the financial markets in a tax-efficient way, through an online broker.

With that said, beginners will likely feel more comfortable choosing the best Roth IRA account that comes with a user-friendly interface and small minimum balance requirements.

I found that brokers like Robinhood are popular with beginners, as there is no minimum deposit requirement and fractional assets of $1 or more are supported.

Is a Roth IRA a taxable investment account

A Roth IRA is a type of individual retirement account (IRA) that is not taxed on the money you withdraw during retirement, as long as certain requirements are met. A taxable investment account is any account that rises in value where that increase is classed as taxable income.

Roth IRA Contributions are made with after tax dollars, meaning that the money you put into the account has already been taxed, so the tax deduction was on your earnings and not on the money you withdraw from your retirement accounts. However, the money in the account grows tax free, and qualified withdrawals (which include contributions, but not earnings) are also tax free.

This is different from a traditional IRA, where contributions may be tax deductible and withdrawals are classed as taxable income.

What is the safest investment for a Roth IRA?

All investments carry an inherent level of risk. Some assets, however, come with higher risk levels than others.

This is why seasoned investors will often build a Roth IRA portfolio that covers many different asset classes and markets.

• Lower-risk assets for a Roth IRA may include US Treasury bonds and index funds that specifically target blue-chip stocks.
• Higher-risk assets will include growth stocks and cryptocurrencies.
• Index funds like the S&P 500 sit somewhere in between.

Nonetheless, index funds, ETFs, and mutual funds are often the way to go when building a risk-averse Roth IRA portfolio. The reason for this is that each investment can get you exposure to hundreds or even thousands of individual assets.

For instance, the Total Stock Market Index offers access to nearly 4,000 US-listed stocks. Similarly, the Total Bond Market Index consists of over 10,000 individual bonds.

Many Roth IRA brokers in the US enable you to invest in the aforementioned index funds from just $1, without paying any commission.

What is the 5-year rule for Roth IRA?

There are many exceptions and variations to the 5-year rule for Roth IRAs, but the key points are as follows.

First and foremost, one of the best things about Roth IRAs is that you can make penalty-free withdrawals at any given time. However, this is only applicable to the contributions you make.

• Should you wish to withdraw your earnings (capital gains), then penalties may apply.
• In the case of the 5-year rule, any earnings generated via the Roth IRA will only be penalty-free if the account has been open for at least five years.
• If not, you may be faced with a 10% penalty on the earnings withdrawn.

Even if you are over the age of 59½., the 5-year will need to be considered. That is to say, you will not pay a penalty if the Roth IRA has been active for under five years, but you will still need to pay tax on any earnings generated during this period.

What is the downside of a Roth IRA?

However, Roth IRAs – like any investment product, also come with a number of downsides.

Low Annual Limits

When compared to a 401 (k) plan, Roth IRAs come with much lower annual limits. For instance, in the 2023 tax year, you can only invest up to $6,500 into a Roth IRA, or $7,500 if you are above the age of 50.

There are income limits as the annual limit is reduced if you are a single filer and earn more than $138,000 annually. This is based on a progressive scale that reduces the Roth IRA limit as the income threshold increases.

For example, those under the age of 50 and on a salary of over $139,500 will only be able to invest up to $5,850 into a Roth IRA for the year. If the salary surpasses $150,000, the Roth IRA limit is reduced to a mere $1,300

Penalties for Early Withdrawals

It is important to stress that Roth IRAs should only be viewed as a long-term retirement plan, meaning that early withdrawals are not advisable.

I mentioned the 5-year rule earlier, but do note that penalties are all but certain to apply for any withdrawals made before you turn 59½.

This is usually at a rate of 10%, but certain conditions may allow you to avoid the penalty altogether.

For instance, if you need the money to cover the cost of childbirth ($5,000 maximum) or to buy your first home ($10,000 maximum). Other personal situations are considered too.

Conclusion

In summary, IRA Roth accounts will enable you to save for your retirement years in a tax-efficient way.

As long as the Roth IRA is open for at least five years and you are not under the age of 59½ – then withdrawals can be made without having to pay taxes.

I should, however, remind you to do plenty of independent research on the pros and cons of Roth IRAs to ensure they are right for your personal circumstances and financial goals.