Retirement Articles

Cheat Sheet / Updated 04-14-2023

Inflation has become a big part of our lives lately. You need help to quickly determine just how much of a bite inflation takes out of, or will take out of, your hard-earned money, especially when you need precise and tailored calculations. This Cheat Sheet summarizes some important factors to keep in mind when you're considering retirement plans like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).

Cheat Sheet / Updated 12-07-2022

Knowing how to build your 401(k) retirement plan, devising investment strategies, and making the most of your plan can all help to financially secure your path to retirement. During economic difficulties, you may be tempted to tap into your 401(k) funds, but most often, you're much better off financially if you can leave the funds alone. And your 401(k) management duties don't end when you retire; you still need to invest and spend wisely.

Cheat Sheet / Updated 10-01-2021

When you’re ready to start setting aside (or withdrawing) money for your retirement — whenever that might be — take a look at the valuable benefits of each of these types of retirement plans. Consider investment recommendations including bundling, pre-tax contributions, and how life circumstances may change your opportunities.

Cheat Sheet / Updated 03-14-2021

No two retirement plans are completely alike. You might have heard that you'll have a comfortable retirement if you save a certain amount of money by a certain age. “Just save a million bucks and you’re good,” such advice goes. But how long a million dollars will last in retirement is up to you, which you can figure out pretty easily. Others say all you need to do is max out your 401(k). And for most people, that’s good advice. But if your goal is to retire really early, you’ll need to get more aggressive in saving money. Perhaps you're starting to fear retirement planning because you’re not doing something that the experts say you must do to retire. Don’t let the endless retirement advice you read and hear paralyze you. You can start a basic retirement plan in 15 minutes.

Article / Updated 03-04-2020

Keeping track of your pension, which is important for planning your retirement, isn’t as easy as logging onto your online brokerage. Most companies are eager to get out of the pension business, so they farm the entire thing out to firms that specialize in pensions, such as Willis Towers Watson. If you need to call for pension help, you'll probably be talking to people who work for the firm your employer hired to handle the pension plan. However, the site operated by the pension firm will usually look like it’s run by your employer. How to use online tools Getting logged into your company’s pension plan usually takes a bit of a work. You might need to call your employer’s human resources department. Then, if your employer has outsourced their pension plan management, you'll probably be handed off to the company running the pension plan. Most pension systems will allow you to look at the following information: Pension estimate: By entering your dates of employment, age, and beneficiary information, the site will tell you the payment you can expect when you retire, as shown in the following figure. As you can see in this example, the single-life annuity results in the largest monthly payout of $641.39. When you add a 50 percent survivor annuity, you’re looking at a monthly payment of $603.54. The survivor annuity payment is smaller than the single-life payment because the payments are likely to last for a longer period of time. Why? When the pensioner who worked at the company dies, a payout continues to the surviving spouse, who gets only half the payment, just $301.77. Lump sum calculator: The pension site should also show your lump sum payment if taken now versus later. This information will help you decide which choice to make. Scenario analysis: Pensions are complicated, with many variables affecting your payout amount. To help you understand the complexities, most pension sites offer scenario analyzers. You enter different retirement ages and whether or not your spouse will get benefits. The scenario analysis calculator then shows how these different choices affect your payout. You don’t have to be retired to take money out of a pension. If you leave a company, you can activate monthly payments or take a lump sum. However, your payments will be reduced if you start taking them before reaching full retirement age. Also know that if you take a lump sum payout and don’t roll it over into another retirement account, you might trigger a nasty tax surprise. How to calculate the value of a lump sum payment One of the trickier decisions with pensions is whether you should take monthly payments or the lump sum. The pension's website can help you make this decision. Although your decision is final, a workaround exists. You can create your own pension, in a way, by using your lump sum payout to buy an annuity. By using both your pension provider’s site and an annuity pricing site, you can easily put some numbers around this complex decision. Here’s how: 1. Use the pension's online tool to get your lump sum payout. Let’s say a 48-year-old worker left a company and wants to take her pension with her. As shown in the figure, her lump sum payout is $70,897.10. The monthly payout amount is $338.46 for a single-life annuity and $337.62 for a ten-year certain and continuous annuity. 2. Go to an annuity pricing site, such as www.immediateannuities.com and do the following: a. Enter the lump sum information. b. Enter your pension details and select the immediate payment option. For the amount to invest, enter the lump sum payout from your pension site. I entered $70,897.10. 3. Compare the monthly payouts. As you can see in the following figure, the monthly payout from the pension plan is higher than what our retiree can buy in the open annuity market. Using the lump sum amount, the payout from the privately bought annuity is $280 for a single life, which is 17 percent less than the pension payout. Similarly, the pension payout with the ten-year certain option is $675 a month. But with the annuity provider, it’s 6 percent less, or $637 a month. 4. Get another estimate. You wouldn't get only one medical opinion for a serious health condition, would you? The same is true for deciding what to do with a pension. Many online brokerages and mutual fund companies, such as Vanguard and Fidelity, tell you what size payment you’d get in exchange for a lump sum. For information on annuities, go to Vanguard's site, Fidelity's site, and Schwab’s annuity site (see the following figure). It’s typical for the payouts from a pension plan to be higher than what you can buy on your own from an annuity. An annuity has fees whereas an employer-sponsored pension doesn't. However, don’t make your decision solely on the size of the lump sum. If you’re young, you could easily invest the lump sum, and then, years later when you’re looking to retire, buy an annuity with the now-larger amount of money. Rolling over a pension Never assume you’re trapped in a pension. And that’s a good thing because many workers tend to not stay at the same job for more than five years. When you leave a job, you can take the pension with you by rolling it over. The rules around rolling over a pension are strict. Even a small mistake can make the lump sum you take from your pension a taxable event. You must rollover the pension into a qualified retirement plan, which for most people means a rollover IRA. Depending on how long you worked at the company, a rollover is likely a good option. You might consider rolling over your pension if you Know the pension won’t grow: Check the pension's documentation. Many pensions provide only a modest cost-of-living annual adjustment, which is just the inflation rate. If you put the money into a diversified portfolio of stocks and bonds, your portfolio will likely grow much faster than inflation. Don’t expect to retire in many years: The longer the amount of time you have to put your money to work, the better. If you don’t plan to retire in ten or more years, you still have time to put your portfolio into areas that are likely to grow faster. Have other forms of guaranteed income: If you have other options for a steady cash flow, it makes sense to try to get a better return from your pension assets. If you don’t have another form of guaranteed income, you can buy one, such as an annuity, by using other savings. How do you conduct a rollover from your pension to a qualified plan? The steps are straightforward: 1. Set up a rollover IRA. All the major online brokerages and mutual fund companies can help you with this task. 2. Initiate your distribution with your pension provider. Most pension providers’ sites allow you to begin the distribution process. You’ll need to take the lump sum distribution method. The pension provider will mail you paperwork to fill out. 3. Fill out the paperwork from the pension provider. Your spouse will need to sign a benefit waiver for you to get the lump sum. 4. Make sure the check is made out to the company you’re rolling into. This step is important. The pension lump sum amount must be made out to the financial firm where you have your rollover IRA. The check should not be made out to you. Depositing the lump sum and then immediately writing a check to the rollover IRA provider will not work. The Internal Revenue Service will think you took the money and want to tax it.

Article / Updated 03-04-2020

When you turn 70-1/2, you’re no longer allowed to contribute to a traditional IRA. You can contribute to a Roth IRA at any age as long as you have earned income below limits dictated by the IRS. Remember that earned income is money you make from reportable income-producing activities—in other words, a paying job. Gearing up to take money out of your IRA requires a change in mindset. Fortunately, your IRA provider can be of help here, too. Getting money out early: 72(t) distributions Taking money out of a traditional IRA before you turn 59-1/2 is generally a no-no with retirement accounts because it triggers a bad tax day. You owe not only the taxes on the money you took out but also a 10 percent early withdrawal penalty—unless you know the 72(t) trick. This rule is named after an arcane section of the IRS code that says you can take money out without a 10 percent penalty if you do so in “substantially equal periodic payments.” You must take out the distributions, in equal amounts, for at least five years or until you turn 59-1/2. You can calculate how much money you must take out in three ways: the required minimum distribution method, the fixed amortization method, and the fixed annuitization method. As you can guess from their names, the calculations are complicated. If you’re interested in a 72(t) withdrawal, your IRA provider can help. You can take money out of an IRA before you turn 59-1/2 without paying the 10 percent penalty in a few other ways, without invoking the 72(t). A big exception for the 10 percent penalty is when you’re permanently or completely disabled. In that case, you can take money out of both a traditional IRA and a Roth IRA. Also, if you die, your beneficiary can take withdrawals. Taking your required minimum distribution When you blow out a cake with 70 candles, know that in six months you’ll be in for a big change with your traditional IRA. That’s when Uncle Sam says it’s time for your required minimum distribution (RMD). It must be taken out before April 1 of the year after you turn 70-1/2. The RMD is calculated using a complicated formula based on your life expectancy. You must take your RMD from all of your traditional IRAs. This requirement is another reason to have your retirement money in one place; you’ll deal with just one annual check. As part of their service, most IRA providers will calculate your RMD. Vanguard shows the calculation in its RMD calculator, shown in the figure and available. Don’t ignore the RMD. If you don’t withdraw the RMD and pay the tax, you’ll owe a 50 percent penalty tax on the money you should have withdrawn. Yes, half will be gone in taxes. Most IRA providers calculate your RMD for you and even withhold some of the tax due from what you’re paid. IRA providers will even deposit the money into your account electronically — almost like a paycheck. Setting up a beneficiary Your retirement funds are there for you and your spouse, if you have one, or other beneficiary to enjoy later in life. Make sure that your IRA provider knows who to give the money to if you die before your beneficiary. Yes, you could do this in a will, but it’s a better idea to set up a beneficiary. Your beneficiary instructions will take precedence over a will. When you die, the IRA provider knows to shift the ownership of the IRA to your beneficiary. Listing beneficiaries on IRA accounts is so important that many IRA providers won’t let you fund an account until you choose a beneficiary. If you have a large or complicated estate or unusual wishes for where your money should go when you die, you might want to create a trust. A trust is a legal entity that can take ownership of assets and follow your instructions in distributing them. Consult with an estate-planning attorney or pick up Estate & Trust Administration For Dummies, 2nd Edition, by Margaret Munro and Kathyrn Murphy (Wiley). A word about inherited IRAs Don’t keep your IRA a secret from the beneficiary. After you die and your IRA passes to your beneficiary, new rules kick in. The beneficiary will need to contact the IRA provider and let them know you’re dead. Most IRA providers require a death certificate. The rules surrounding inherited IRAs vary based on whether or not the IRA is inherited by a spouse. If spouses inherit an IRA, they have a choice on how to take it over: Make it their own: Spouses can choose to take over the IRA in their own name. This allows spouses to contribute or take distributions as if it were theirs in the first place. Turn it into an inherited IRA: If you go this route, you’ll need to follow rules set out by the IRS, which have many options. A beneficiary who isn’t a spouse has only one avenue: transferring the IRA into an inherited IRA. Again, your IRA provider will help with the details. If you’d like to read more about how inherited IRAs are handled, check out Vanguard's description. Schwab shows all the inherited IRA rules, too.

Article / Updated 03-04-2020

Getting money into your IRA is where the magic begins. You can’t build a portfolio until a source of funds exists. IRAs give you not only big leeway in what investments you buy but also lots of control over how you buy those investments. Set up IRA deposits When you’re talking about putting money aside that you can’t touch for decades, it’s easy to understand why lots of people put off retirement savings. Let’s face it, blowing $800 on a new smartphone is more immediately satisfying than putting $800 in an IRA. IRA providers know this, and go out of their way to make it easy for you to get money into your account. You can make ongoing contributions to your IRA in two main ways: One-time contribution: The IRA provider lets you connect multiple checking and savings accounts to your retirement account. You can then tell the provider to digitally pull money from one or more of those accounts as a contribution. Vanguard’s one-time contribution screen, shown in Figure 8-5, asks you to choose the investment you want the money to go into. It also tracks your annual contribution to date. Automatic contribution: You can also tell your IRA provider to take money from a checking or savings account, say every month or quarter. This method puts your retirement plan on autopilot. It’s up to you to make sure your contributions meet the requirements and don’t exceed limits. If you’re covered by a retirement plan at work, the IRS spells out whether you can deduct your IRA contributions. If you make too much money, the deducible amount of your contribution is reduced or eliminated. In a nutshell, if you made more than $74,000 as a single taxpayer or $123,000 married filing jointly and are covered by a plan at work, you can’t deduct IRA contributions. Roll over Beethoven: IRA rollovers Another way to fund an IRA is a rollover. You might opt to rollover your old 401(k) from a previous place of employment, which can be a good idea if your old 401(k) has high fees or poor investment choices. You can rollover funds also from one IRA to another, although that process is usually called a transfer. Generally, it's best to keep your retirement accounts in as few places as possible. Consolidating your retirement funds with one IRA provider helps you qualify for lower-priced investments and makes it easier to keep track of your money. A rollover involves three steps: Fill out your IRA provider's rollover form. The form is usually short, asking for the account number and the provider holding the funds now. You’ll also be asked if you’d like to roll the funds into a new IRA or an existing one. Notify the 401(k) or IRA provider you’re moving from. Tell them you’re moving the money and where you're moving it. The provider will cut a check for the money. Make sure the check is made out to the firm where the money is going, not to you. If the money goes to you, the IRS might think you took a distribution and hit you with a tax bill. Wait. A rollover can take a few weeks. Your new IRA provider will let you know when the process has been completed. Fund an IRA with a Roth conversion With traditional IRAs, you get a tax break now. With a Roth IRA, you pay now but take out the money later free and clear. Guessing which will be best for you is difficult. In general, a Roth is a good idea if you think your current tax rate is lower than it will be when you’re retired. Roth IRAs are preferable also if you think you might need to pull the money out sooner than in retirement, or if you think you won’t need the money and want to leave it for a spouse or an heir. Traditional IRAs require you to take money out when you turn 70-1/2. With a Roth, you can leave the money in. Given all the guesswork in choosing a Roth IRA versus a traditional IRA, you might change your mind about the kind of IRA you want. That’s where a Roth conversion comes in. You can turn a traditional IRA into a Roth IRA if you pay the taxes now. Converting a traditional IRA to a Roth can make sense. It’s also a back door way to open a Roth for people who earn too much to fund a Roth. A Roth conversion has several drawbacks, however. You must wait at least five years after a conversion to take money out of a Roth. The conversion also triggers a tax event — you’ll have a tax bill on those tax-deferred contributions. Does a Roth conversion make sense for you? To answer that question, you can use a variety of online tools, including the following: Schwab IRA Conversion Calculator: This tool helps you think about all the important variables that determine whether or not you should convert to a Roth. These variables include the amount of money you’d like to convert and your taxable income. CalcXML’s Roth Conversion Calculator: This tool does all the math to see whether a Roth conversion makes sense. The calculator considers the size of the conversion as well as your age and income needs.

Article / Updated 03-04-2020

If you’re not online with your IRA provider, it’s time you were. If your IRA provider is keeping up with industry trends, you’ll be amazed at the digital resources available to you. You just need to know what to look for. It might seem tempting to skip the process of registering for online access of your IRA account. If you do that, though, you’ll seriously miss out. Yes, you could manage your IRA over the phone and through the mail. But even if you’re a hands-off investor, you’re much better off doing everything online. Be sure you know how to get online access to your 401(k)as well. How to open your IRA account Opening an IRA varies based on the provider, but you can expect a basic script similar to the following, which is the way Vanguard does it: Go to the IRA provider's website and find the button for opening an account. IRA providers make this button easy to find. On most sites, it's in the upper-right corner of the screen. Choose a new account or a rollover. Remember, you can always open a brand new IRA account if you’re just getting started. But if you’ve been saving for retirement somewhere else, you can rollover, or transfer, money from a 401(k), another IRA, or sometimes even a pension. Show me the money. The first thing the IRA provider will want to know is how you’ll fund the account. You can electronically move money from a checking or savings account. You can also rollover from another plan or transfer securities you own elsewhere. If you're funding your account through your bank, you need your bank account information. Do one of the following: If you already have another account with the IRA provider: You might have an older account with the IRA provider. If you do, sign in. By opening the new IRA with your existing login information, you'll avoid typing lots of information all over again. It’s also easier to manage your accounts if they’re associated with the same username. If you’re opening a first account with the IRA provider: Be prepared to answer a bunch of questions. You’ll need to enter information about yourself, including a Social Security number and address. Choose the type of account: You need to know the type of account you want to open. You'll be asked if the account is for retirement, general savings, or education (as shown in Figure 8-1). If you choose a retirement account, you’ll be asked if you want a traditional IRA, Roth IRA, SIMPLE IRA, or SEP IRA. Answer questions, set up funding, and e-sign. You’ll be asked to enter the amount of your initial investment. If you’re opening an account with this IRA provider for the first time, you’ll also need to enter a username and password for online access. Wait. Some IRA providers will open your account immediately if everything you entered checks out. Others, such as Vanguard, confirm your information, which can take a day or two. Log in and look around The long road to setting up your IRA is over and you're now an IRA owner. How cool is that? Next, it’s time to see what you can find on the IRA provider’s site. The list is long: Account information: All IRA sites can tell you how much is in your account (your balance) and your investments, or Account activity: Any time you put money into (contribute to), your IRA or take money out of (withdraw from), your IRA, the transaction is recorded. Your account activity shows the comings and goings of the money in your account. Money can come into or go out of your account, even if you’re not putting it in or taking it out. Is your long-lost rich uncle putting money into your IRA? Nope. If you own stock in a company that makes a profit beyond what it needs, the company might pay you, the investor. These payments are called dividends and appear in your account activity. What about money coming out? Fees. The IRA provider might take money out of your account for account-servicing costs. If you own mutual funds, the (sometimes large) fees they charge won’t appear in the account activity listing. Mutual fund fees are taken out of the fund itself. Performance: Remember getting a report card when you were a kid? Your IRA's report card is its performance tracking. Here you see how much your IRA is growing or shrinking during the year and over the long term. Asset mix: Your asset mix, or asset allocation, is the combination of asset classes in your portfolio, such as stocks and bonds. The more stocks in your portfolio, the riskier your portfolio but the more it's likely to grow in the long term. Understand your portfolio holdings If you want to dig deeper into what you own in your IRA, look for an area called Holdings. In this section, you’ll find the following important attributes of the investments in your account: Summary: Here you’ll find the name of each investment you own and its symbol. Mutual funds and other investment funds are identified by a multi-character abbreviation, or symbol. This symbol is useful if you want to look the fund up using a third-party site. Returns: The amount of money you make or lose from an investment is more than how much its price has changed. It’s also a tally of the dividends paid. The Returns section adds all this together. You can find your return on an investment during several time periods, such as one, three, five, and ten years. Cost basis: Your cost basis of an investment is how much you paid to buy it. If you paid $100 for a share of a mutual fund that’s now worth $110 a share, your cost basis is $100. If you sell the mutual fund for $110 a share, you have a realized capital gain, or profit, of $10. If you don’t sell the mutual fund but hold it, you have an unrealized capital gain of $10. Your IRA provider tracks capital gains for you. Tracking your capital gains is a big deal with taxable accounts but not with tax-deferred ones such as traditional IRAs. With a taxable account, you pay taxes on only your realized gains. But with an IRA, your entire withdrawal is taxable—even your cost basis because it hasn’t been taxed yet.

Article / Updated 03-04-2020

Many employers tout their 401(k) plans as a job perk. But, typically, you're on your own when it comes to setting up online access. In some ways, this situation is symbolic of how the responsibility for retirement planning has shifted to employees. Not only do employers want to scale back how much they contribute to your retirement, many don’t even want to help you manage the account. How to register for 401(k) access Most 401(k)s are established on paper. The paperwork you sign when you join a company opens the account and gives the 401(k) plan administrator the right to take money out of your paycheck. But you can’t do much with the account until you register for online assess with the 401(k) plan site. After that, you can see your balances, make changes, and evaluate how you’re doing. You might be surprised at some of the online tools you can pick up right from your 401(k) plan provider. Nearly all 401(k) sites offer useful calculators and information to help you better prepare for retirement. What kicks off the process of setting up 401(k) account access? Ironically, it’s probably snail mail. At some point after starting a job or signing up for a 401(k), you should get a letter in the mail from your 401(k) administrator with your summary plan description. This document, similar to the one shown, lets you know that the account is established and that you can set up online access. If you look closely, you’ll see a website address in the upper-right corner of the summary plan description in the figure. In this example, it’s www.voyaretirementplans.com. From here, you’ll want to follow these steps to register: Click the Register Now button. Just about all 401(k) sites put the button just below the log-in section, as you can see in this figure for the Voya example. Choose an identification method. Sites usually ask for either your personal identification number (PIN) or your Social Security number and date of birth. The PIN would have been sent to you in the mail. If you didn’t get a PIN, go with door #2, because you know your Social Security and birthday. Create your log-in information. You are asked to choose a username and password. Try to choose something difficult to guess—or better yet, use a password manager. Passwords are getting more complicated in an effort to keep hackers out. Choose a password that’s not a real word, and use a string of symbols, numbers, and uppercase and lowercase letters. Try to come up with something only you will know. For example, suppose you’re a Star Wars fan. Rather than using starwars as a password, use MT4ceBWY. (Get it? May the Force be with you.) Get to know your 401(k) tools The beauty of 401(k) plans is their hands-off nature. If you’re like many 401(k) investors, after you sign up for the plan, you don't want to think about it—and you certainly don't want to do is dig around the various features of the 401(k) provider’s website. But you might be surprised at some of the online tools you can pick up right from your 401(k) plan provider. Nearly all 401(k) sites offer useful calculators and information to help you better prepare for retirement. Using the tools on your 401(k) plan provider’s site is helpful because you already have log-in information with them, and many of the tools can be personalized because your details are already there. A few helpful tools to look for on your 401(k) plan provider’s site follow: Calculators: Most 401(k) providers will use your account details as inputs for calculators. You’ll likely find a contribution calculator that will tell you if you’re putting enough in your 401(k) to meet your full-year contribution goal. This tool is useful if you want to max out your 401(k), putting in the most legally allowed. The tool will also tell you what percentage you should take out of your paycheck to hit your annual contribution target. Also look for a retirement overview calculator. This tool helps you see how much money you should have when you retire based on your savings rate, income needs, and rate of return. Lastly, 401(k) providers offer retirement income estimate calculators. These tools look at how much you’re saving and your expected returns, and estimate how much income you might expect in retirement. Investing education: You’ll likely find useful articles and videos to coach you on the importance of diversification and asset allocation. You might also find information on related topics such as estate planning. Risk questionnaires: Some 401(k) sites feature basic questionnaires that will help you see how much risk you can handle. You’ll be asked how much you know about investing, how much volatility you can handle, and your age. Some 401(k)-planning sites use this information, paired with what the plan administrator already knows about you, to offer a possible asset allocation, as shown. Your asset allocation is the mix of asset classes expected to give you the best return for your level of risk. Typically, your appetite for risk is a function of how much volatility, or ups and downs in portfolio value, you can endure. For example, suppose that the target-date fund for your retirement year suggests a middle-of-the-road portfolio of 60 percent stocks and 40 percent bonds. But after taking the questionnaire, the 401(k) provider’s site might suggest a more aggressive portfolio with 70 percent stocks and 30 percent bonds. Check out your 401(k) performance Before you think about making your 401(k) work better for you, it’s wise to see how it’s doing so far. 401(k) provider sites help you track how much return you’re getting on your money. Measuring investment performance is important and something you should count on from your 401(k) provider. The results of the calculation tell you if your investment choices are delivering what you need to reach your goals. Performance statistics also tell you if you’re getting results that are at least keeping up with the average. If your portfolio returns are less than market returns, or indexes, that’s a big sign that you should optimize your 401(k). Most 401(k) sites will help you see your portfolio performance in two ways: At the fund level: Nearly all 401(k) plans have an Investments section. Here you can look up how the funds have performed over various time periods, including short periods (such as a month or year) and longer periods (such as five or ten years). The data is typically shown in a table like the one shown here. If you own only the 401(k)’s target-date fund, look up your particular fund in the investments list. This might be all the information you need to know how you’re doing. As a personal rate of return: 401(k) providers don’t just tell you how the funds in the plan have performed. They also keep track of how you have done. What’s the difference between the funds’ returns and your returns? Keep in mind that some investors spread their portfolios over multiple funds. They might also move money from one fund to another. The timing of your contributions matter, too. The personal rate of return incorporates all these factors to arrive at your total return.

Article / Updated 03-04-2020

Your IRA is an important part of your overall retirement plan. One of the great perks of using an IRA is the full control you have over it. You’re free to choose the financial firm you’ll work with and your investments. But this extra control means you’ll have to do some additional legwork to get things set up to your specifications. Don’t let the choices stymie you. Know what you’d like to own It might be tempting to call the usual suspects — the financial firms that always advertise their IRA services during golf matches. But first think a bit about what investments you plan to buy. The number of financial firms offering IRA services is almost infinite. All the big players and many smaller ones will let you set up an IRA. Most will also waive setup costs just to get you in the door. IRA providers are distinguished by their investment menus. You'll typically put the following investments in an IRA: Individual securities: If you want total control, consider choosing individual bonds or stocks. Rather than owning a mutual fund that holds hundreds of stocks, you might want to own the ten stocks you like best. Mutual funds: A mutual fund is the most common investment in IRAs. You put money into a fund that’s used to buy individual securities. You then pay a fee. With index funds, you own all the securities in an index, such as the Standard & Poor’s 500. With active funds, you pay fund managers to select the best investments. These funds usually cost more than index funds. Mutual funds are priced at the end of the day. Exchange-traded fund (ETF): With an ETF, you own a portion of a basket of investments. Most ETFs are based on indexes and have very low fees. ETFs are priced like stocks, meaning their value changes during the day. ETFs are increasingly popular due to their low fees and no minimum investment. If you want to actively trade individual stocks in your IRA, you might not get what you’re looking for from a traditional mutual fund company. Consider a discount broker instead. Similarly, if you like the products from a particular mutual fund company, you might want to work directly with that fund company to create an IRA. Keep your investment strategy in mind when you look at IRA providers. Choose someone to handle your IRA The company you choose to house your IRA is important because it will be your financial wingman. If you call just about any financial firm and ask if they’ll take your IRA, the answer will always be yes. IRA customers are dream clients. They invest large sums of money, typically have jobs, and usually don’t touch the money for a long time. And many don’t pay attention to the fees they’re paying. With that said, most of the firms you’ll want to consider for your IRA needs are in one of three main categories: mutual fund companies, traditional and discount brokerages, and robo-advisors. Robo-advisors are making waves in the IRA business. Originally, robo-advisors were a handful of tech startups with smart people who found a way to make the investing process easier. You’d go to a website and answer a survey, and the site would choose your investments and diversify your holdings. Robo-advisors measured your appetite for risk and spread your money over low-cost investments. But the world of robo-advisors has become blurry. Although many firms that are exclusively robo-advisors are still in action, mutual fund companies and brokerages are into the game, too. For example, mutual fund company Vanguard offers one of the most popular robo-advisor services. Keep the changing robo-advisors landscape in mind while considering which route is best for you. If you like your online brokerage, inquire to see if it offers a robo-advisor before moving your money to another firm. Mutual fund companies All mutual fund companies are happy to handle your IRA account, and most make the process as simple as possible. However, it’s difficult to paint them all with the same brush. For instance, just a few, such as Fidelity, have impressive technology tools. And only some mutual fund companies, Vanguard among them, have adopted innovations such as exchange-traded funds. If you’re interested in using a mutual fund company, you need to understand the advantages and disadvantages it offers for your IRA. The advantages of mutual fund companies follow: If you buy the company’s own funds, you can often avoid paying trading commissions. Customer service representatives have a good understanding of the investments. The companies typically have long track records. These firms are focused on long-term retirement plans. You won’t be urged to buy hot stocks or to trade. Some mutual fund companies offer excellent educational materials to help you avoid making short-term decisions that you’ll regret later. The disadvantages of mutual fund companies follow: You’re typically encouraged to use the offerings from just one fund family. This restriction might be a problem if you like, say, one fund company for bonds and another for stocks. Mutual fund companies are typically slow to innovate and might not offer some investments you're interested in. Their technology tools can be rudimentary. Popular target-date funds are made up of their own funds, which may or may not be the best for you. Some of the largest mutual fund players follow: Vanguard is the king of low-cost passive investing. The company’s founder, John Bogle, created the company based on the idea that most mutual fund companies spend too much money trying to beat the market, when so few reliably do. With a Vanguard IRA, you can invest in the fund company’s massive suite of best-in-class index funds. You can open an account with an initial deposit of $1,000. To buy many of Vanguard’s mutual funds, you must invest at least $3,000. There’s no cost other than the low Vanguard fund fees. And if you sign up for electronic documents, Vanguard will waive the $20 annual fee. Vanguard is a leader in increasingly popular exchange-traded funds (ETFs). You can buy them for no commission at Vanguard, and many ETFs don’t have minimum deposits. Fidelity shows that a mutual fund company can have major technology chops. The company’s website and mobile apps keep up with those offered by brokers and robo-advisors. Meanwhile, Fidelity is challenging Vanguard on the fees front. Fidelity offers a number of index mutual funds that do not charge an expense ratio, which is the annual fee you pay to own a fund and is measured as a percentage of how much you’ve invested. For example, if you have $10,000 invested and a fund has a 0.2 percent expense ratio, you'll pay a yearly fee of $20. Fidelity offers the Fidelity ZERO Large Cap Index Fund, which is even less expensive than the rock-bottom 0.05 percent annual fee charged by Vanguard’s comparable fund. Fidelity seems aware of its head-to-head competition with Vanguard, as you can see in the following figure. Fidelity also offers a range of actively managed mutual funds, which hire people who try to find stocks that they think will do better than index funds. These funds typically charge more than index funds, up to 1 percent. Rowe Price is a well-regarded traditional mutual fund company. What makes T. Rowe Price unique is that it focuses on actively managed funds. (It also offers a few index funds, but not as many as Vanguard or Fidelity.) Unlike some other actively managed fund companies, though, T. Rowe Price works directly with investors instead of only through financial advisors. The fees charged by T. Rowe Price funds tend to be higher than the fees for index funds. Some of the other mutual fund companies that offer IRAs, such as Franklin Templeton, work directly with investors to set up accounts. If you're interested in a particular mutual fund company, see if they work directly with individual investors. Some other large mutual fund companies, such as BlackRock, Invesco, and American Funds, typically work with financial advisors or brokerages. So, if you want a BlackRock fund in your IRA, you must hire an advisor to buy it for you or buy it yourself through a brokerage. You see how to do this later in the "Connecting with a Financial Planner" section. Traditional and discount online brokerages Sticking with a mutual fund company may be comfortable and convenient, especially if you opened an IRA because your employer doesn’t provide a 401(k). But using a mutual fund company for your IRA takes away one of the reasons why you may have opened it: control. Using an IRA allows you to be in the driver’s seat of your retirement. Buckle up! Following are the advantages of an IRA: You’re the boss. You can mix and match investment products from different providers. The brokers, especially discount online brokers, usually have best-in-class websites and apps. You have access to brokerage services. Many of these firms started as places to buy and sell stock. If you’re interested in online investing, you might want an account here. Many of these brokerages can not only hold your IRA but also help you with checking and savings accounts. Many brokerage firms have branches, so you can head to an office and meet with a person face-to-face. Online brokers are quick to add new features such as ETFs, robo-advisory services, and human help. Following are the disadvantages of an IRA: Commissions might be charged on investments you could get free elsewhere. This is especially true with some mutual funds. Brokers might steer you toward certain products. Some brokerages are more geared for online trading rather than long-term investing. Some of the major players are the most popular names in financial services: Charles Schwab: It’s hard to talk about do-it-yourself IRAs without mentioning Chuck. An industry pioneer, Charles Schwab has just about any product you could want. You can buy mutual funds, including thousands with no commission. You can open any type of IRA with no fees and no minimum requirements. The company also offers its own ETFs and provides a robo-advisor, as shown in the following figure. And if you want to buy or sell individual stocks to avoid annual fees charged by funds, you can do that, too. Schwab used to charge $4.95 a trade. But in late 2019, Schwab, along with most of the major online brokers, cut stock trading commissions to $0. If you buy any of the 500 ETFs in its Schwab ETF OneSource, there’s no commission. Schwab also has offerings for people who are not interested in choosing their own investments. Its Schwab Intelligent Portfolios, which is essentially a robo-advisor, will assess your risk appetite and put your money in Schwab ETFs to fit your goals. There’s no fee for the service, but there is a $5,000 minimum. You’ll also pay the fees on the Schwab funds, which may not be the lowest. If you want a more customized portfolio, you can use Schwab Intelligent Portfolios Premium, which costs $300 upfront and $30 a month thereafter. The minimum deposit is $25,000. Don’t be fooled by the so-called free nature of Schwab Intelligent Portfolios. You pay the underlying fees of the ETFs. Also, Schwab will put part of your portfolio in cash. That cash will get next to no return, which costs you in lost interest. For example, suppose Schwab puts $50,000 of your portfolio into cash. If you instead put that money in a savings account at 2 percent interest, you’d get roughly $1,000 a year in interest. TD Ameritrade: TD Ameritrade is another behemoth in the IRA business. The company, whose roots are in stock trading, is a leader in providing top-notch tools for monitoring your portfolio and the market. They also provide state-of-the-art stock and bond research tools. TD Ameritrade in 2019 cut its $6.95 per stock trade commission to $0. It also has no minimum and no ongoing fees. If you’re looking for more help, check out TD Ameritrade's Essential Portfolios, a robo-advisor that will put your money into low-cost ETFs to match your goals. You pay 0.3 percent a year for Essential Portfolios and up to 0.9 percent for more customized portfolios. Ally: Ally has rapidly grown from being an online bank to a legitimate option for retirement investors. Ally is focused on two types of retirement investors: do-it-yourselfers and those looking for a turnkey solution. If you’re a do-it-yourselfer, you can buy and sell stocks, including ETFs, for no commission. If you’re looking for more automated help, Ally offers its Ally Invest Managed Portfolios, a service that is essentially a robo-advisor. You answer questions about your financial goals and Ally puts your money in a number of low-cost ETFs. The service charges a 0.3 percent fee on your balances. E-Trade: This online brokerage firm has come a long way since its Super Bowl ads featuring a talking baby. Like TD Ameritrade, the company’s roots are in low-cost online stock trading, and it offers online stock trades for no commission. E-Trade has since broadened its offerings. In addition to the standard traditional IRA and Roth IRA, it also has an E-Trade Complete IRA that helps you manage withdrawals after you turn 59-1/2. You can choose from a number of prebuilt portfolios that match your risk tolerance. For an initial deposit of $500, you can build a portfolio made up of mutual funds. If you prefer ETFs, the minimum deposit is $2,500. You do not pay a fee for the portfolio, but you must pay each fund’s fee. For a 0.3 percent annual fee, E-Trade also offers a robo-advisor that is more customized than the prebuilt portfolios. You can choose from five sample portfolios. This option also gives you more control to increase or decrease investments to make your portfolio more or less aggressive. JPMorgan Chase’s You Invest: JPMorgan is competing aggressively with its You Invest offering. If you want to decide which investments you want, you can. The You Invest Trade offering lets you buy stocks and ETFs for $2.95. If you meet certain balance requirements, you may qualify for free trades. A separate offering called You Invest Portfolios is JPMorgan’s robo-advisor. You pay 0.3 percent of your portfolio balance, and JPMorgan puts you into its lineup of ETFs. What’s a bit different is that you don’t pay any fees for the underlying investments. For a summary of the offerings described in the preceding list, check out this table. Five Brokers to Consider for Your IRA Broker/Bank Stock Commission Commission-Free ETFs Available Robo-Advisor Fee (Annual) Charles Schwab $0 All trades free, including ETFs $0 for basic, $300+$30 a month for advanced version TD Ameritrade $0 All trades free, including ETFs From 0.3% to 0.9% plus investment fees Ally $0 All trades free, including ETFs 0.3% plus investment fees E-Trade $0 All trades free, including ETFs 0.3% plus investment fees JPMorgan Chase’s You Invest $2.95 (after the first 100 free trades) First 100 trades free; some customers get more free trades if they have other relationships with the bank 0.35% Most major banks offer their customers IRAs. If you already have a savings or checking account with a bank, see whether an IRA account at the same bank makes sense. You might get additional perks if your balance is high enough. Robo-advisors Online shopping has made it easy to get a Bart Simpson chess set delivered to your door the next day. Technology is trying to bring the same convenience to your IRA. Some financial firms are first and foremost robo-advisors. Betterment and Wealthfront were pioneers in the robo-advisor business, but they broadened their offerings as traditional brokers launched robo-advisory businesses. Why are online brokers opening their own robo-advisors? For people who don’t want to think about IRAs, a robo-advisor can be a good option. Just answer a risk questionnaire, and the system chooses a handful of investments that fit your risk profile. Most robo-advisors charge 0.3 percent or so a year, which is much less than the 1 percent or more charged by human advisors. In addition to simplicity, robo-advisors offer the following advantages: Automatic rebalancing: All robo-advisors, including those from the mutual fund providers listed in the “Mutual fund companies” section and the brokers listed in Table 6-2, handle rebalancing. This is the process of shifting money from one asset class to another if one is doing so well you own too much of it. Automatic tax-loss harvesting: If you’re losing money on an investment and sell it and then wait more than 30 days to buy it back, you might get a tax write-off. Most robo-advisors are smart enough to do this for you. Instant diversification: You know to not put too many eggs in one basket. The same is true for investing. You can let a robo-advisor handle it for you. Dollar investing: This perk is subtle. If you want to invest a set amount in your robo-advisor account, you can. The robo-advisor handles all the math on how many shares you can buy. No commissions on transactions: Typically, after you pay the annual fee, there’s no commission when you buy or sell. Most of these advantages of robo-advisors apply to the robo-advisory businesses of the brokers, too. Following are the disadvantages of robo-advisors: Fees: All this robo-magic isn't free. You can save money by doing everything the robo-advisors do, including rebalancing. A 0.3 percent fee might sound small, but it adds up fast. The fee is $300 a year on a $100,000 portfolio. If you don’t trade much, a broker might cost less. Little to no control: If you want any say in what you’re buying, a robo-advisor might frustrate you. Some robo-advisors allow you to customize what you’re buying, but fees might rise. Difficulty seeing what you’re buying: Robo-advisors can be a black box. You might know only that you’re buying a stock ETF or a bond ETF, not that you're buying an ETF from BlackRock, Vanguard, or State Street, or another provider. If you’re looking to team up with a pure-play robo-advisor, consider the following: Betterment: When you get to Betterment’s site, shown here, you immediately get a sense of its mission: simplicity. The site breaks down the three objectives you might have: Getting started for the first time, completely automating your portfolio, and having more of a say. Unlike some robo-advisors, Betterment gives you more control and lets you tweak its suggestions. Prefer to be 30 percent invested in bonds rather than the 40 percent Betterment recommends? You can change the allocation. Betterment’s basic offering costs 0.25 percent a year, plus the fees of the underlying investments. If you want access to a financial planner, you can get the Premium service for 0.4 percent. Wealthfront: Wealthfront is the chief pure-play robo-advisor rival to Betterment. Wealthfront is more focused on people who want total automation. It also adds some nice banking features. For instance, Wealthfront offers a high-interest savings account where you can put cash you don’t want to invest right now. Many brokers pay next to nothing for cash sitting in your account. The service charges 0.25 percent of the amount in your portfolio, including cash. Personal Capital: At first, Personal Capital looks similar to a money-tracking service such as Mint.com. It has two powerful tools: The financial accounts monitoring tool helps you pinpoint your spending, and the retirement planning tool looks at your balances and tells you how you’re progressing toward retirement. But Personal Capital is also an advisory service, including a robo-advisor. For a 0.89 percent annual fee, Personal Capital will recommend a portfolio of ETFs. Personal Capital also offers live financial planners who will help you online not only with retirement planning but also other goals. Acorns: When planning for retirement, you just have to get started—even if you have only a small amount to invest. Acorns takes this theory to the extreme. This robo-advisor lets you save and invest your pocket change. Acorns offers several services to help you with your spending and investing. And its Acorns Later service can give you a hand planning for retirement. It all starts with an Acorns debit card linked to an Acorns checking account. When you buy goods and services with your Acorns debit card, Acorns will round up the amount and invest the rest. If you buy a can of soda for $1.50, Acorns will round up to $2 and invest the 50 cents. You might decide to put this round-up money to work for retirement. If so, Acorns will recommend the right type of IRA for you. Everything is automatic, and Acorns will spread your money in a variety of ETFs, primarily from Vanguard. The Acorns IRA service is a reasonable $2 a month—until you’re a millionaire. Then it’s a pricey $100 a month per million invested. Bill Gates, you might want to put your IRA somewhere else. This table compares the major robo-advisors. Comparing Robo-Advisors Broker/Bank Account Minimum Robo-Advisor Fee (Annual) Betterment $0 for basic digital and $100,000 for premium 0.25% for basic digital and 0.4% for premium, plus investment fees Wealthfront $500 (more for additional services) 0.25% plus investment fees Personal Capital $25,000 0.89% for first $1 million invested Acorns Later $5 $2 a month with under $1 million invested, and $100 per million a month after $1 million