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Which is the Best Broker for an IRA?

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Retirement Nest EggsOne of the most frequent questions I get is “Where should I open an IRA?”

Short answer: Anywhere, just open one! If you want mutual funds, open an account with the company that offers the funds you want, like Vanguard, Fidelity, etc; because they will let you buy and sell the funds for free. If you want stocks, open an account with a company that offers the lowest fees.

Minimize Fees

The best brokerage for an IRA is the one that will charge you the least amount in fees. Since you are only allowed to contribute a limited amount into your IRAs, the importance of minimizing expenses is exceptionally magnified. The contribution limits for Traditional and Roth IRAs for 2009 is $5,000 (+$1000 if you’re aged 50+). With a taxable brokerage account, you can always contribute more and pay the fees out of your pocket. You can’t with an IRA, once you pay the fee, you lose the tax advantaged status of those dollars forever. If you have to pay an $50 administrative fee, you’re automatically losing 1% each year.

1% may not seem like much, but over forty years, the difference between earning 5% and 4% is staggering. On $1,000, the investor earning 5% will have over $7000 after forty years; the investor earning 4% will have $4800.

  • Vanguard: All my retirement investments are with Vanguard (with the exception of my Solo-401k, because Vanguard didn’t offer one at the time) because I like the inexpensive mutual funds they offer. Vanguard IRAs do not charge account service fees if you sign up for paperless statements (“e-service package.”).
  • Fidelity: Fidelity IRAs do not charge brokerage account fees, according to their front page. I don’t have an account so I can’t confirm this. One benefit that Fidelity has over many of its peers is that you can open a Fidelity AMEX card and get 2% cashback contributed to your IRA.
  • TradeKing: They charge $4.95 per stock and option trade, $14.95 per no-load mutual fund purchase and sale (this is why going direct to the fund company is better). They do not charge an IRA annual fee but they do charge transfer out fees and termination fees (full fee schedule).
  • E*Trade: They charge $12.99 a trade, almost 3X TradeKing, but on no-load, no-transaction-fee funds they will not charge you a transaction fee (otherwise it’s $19.99 on the other transaction fee funds). I listed them because they may not offer cheap stock trades but they do offer cheap mutual funds, so if you want both, this might be a good way to get it.
  • TDAmeritrade – They offer slightly cheaper trades than E*Trade, $9.99 (regardless of account balance or trade volume), and they do not charge any hidden fees, maintenance fees, or inactivity fees. If you want mutual funds, you will pay $49.99 if they are no load funds that aren’t on this NTF fund list. It’s pricey on mutual funds, but I wanted to throw another option out there.

Investment Options

Ever broker will offer the same investment options. The typical retirement menu will feature stocks, bonds, and mutual funds. If you want to go strictly with mutual funds, go direct to the mutual fund company because they will give you the best prices. If you want only stocks, open an account with a broker that offers cheap trades and no account fee. If you want both, then it gets to be a little tricky. E*Trade is one of the few reputable award-winning brokers that won’t charge you a transaction fee on some no-load mutual funds. I haven’t exhaustively reviewed this

Check Minimums

The one downside of going direct to mutual fund companies is in the minimums. Vanguard requires a minimum of $3000 and then additional investments have a minimum of $100. Fidelity has a $2,500 minimum but they will waive it if you enroll in automatic contributions of $200 per month (or $600 per quarter). The brokers will usually have low or no minimums (E*Trade has no minimum, TDAmeritrade has a $500 minimum).

Ignore Promotions

E*Trade’s current promotional offer is 100 commission-free trades on stocks and options within the first thirty days. Ignore it. These are retirement assets you won’t access for decades, many of the free trade promotions will only distract you from the broker characteristics that matter – investment options and fee schedule. TDAmeritrade offers 30 days of commission-free trades when you open an account with $2,000 – don’t be distracted.

Free trades sound good, but lower fees are far more important. An investor with $900 growing at 5% for forty years will have $6335; an investor with $1000 growing at 4% for forty years will have $4800. At best, the 100 free trades offer is meaningless. At worst, it’ll cost you thousands of dollars.

Awards

I don’t think you can assess how good a broker is through awards, but I can say that I read the criticisms very closely whenever they are published. I recapped the 2008 Smart Money best brokers report but each one of the brokers has their own page listing their awards.

Where do you have your IRAs? Any recommendations or other “gotchas” to look out for?

(Photo: dawnzy)

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19 Responses to “Which is the Best Broker for an IRA?”

  1. Great overview of the well known brokerages! I have bounced my Roth IRA account around quite a bit when brokers started either charging an annual maintenance fee or started charging fees for mutual fund transactions.

    The brokerage I’m with now, thinkorswim (www.thinkorswim.com) is great! They have great customer support, 3 free mutual fund transactions a month, and stock trades are pretty cheap, as well (Between $5 and $9.95 depending on the number of shares you’re buying). They also have access to about every mutual fund family out there with no transaction fees. The trading platform is a little intimidating as it’s meant for serious stock/options traders, but it works fine for simple mutual fund investing as well.

    If you’re going to select funds from many families and don’t see yourself performing more than three transactions a month, they’re definitely my top choice for holding an IRA. If you’re pretty sold on one fund family and don’t see yourself trading stocks, I absolutely agree with your statement about opening an account with that broker.

  2. pfmoron says:

    What about Scottrade?

    Everyone seems to tout E*trade and TD Ameritrade as “low cost” brokers but Scottrade beats them both with No Fees, $7 stock & ETF trades, and $17 Mutual Fund Trades.

    I use Scottrade and the two major negatives are No Dividend Reinvestment and Miserable Interest Rates on Cash Balances. However, as far as Fees/Commissions, Customer Service, and Local Branches, I have been extremely happy with Scottrade for many years now and can’t figure out why they are so often overlooked by PF bloggers.

  3. Big fan of Vanguard also. Would also add, T. Rowe Price to that list. They have the lowest minimums.

    For anyone that can afford their $3,000 minimum, I would go with them with Vanguard. The main reason, I believe their Target Retirement Funds are better then Fidelity’s.

  4. thomas says:

    I got Fidelity. I remember I wanted Vanguard when I started years ago, but I can’t remember why. Maybe it was the minimum investment. My place of business also uses Fidelity for 401k and stock purchase plans so that is an added convenience.

    • Jim says:

      I think having it all at once place, especially if it’s a good place like Fidelity or Vanguard, is always a plus. I like keeping things simple, it makes it easier to keep a handle on things.

      • Jean says:

        I have my IRA with AIG which does charges me a 1% fee that I just discovered after reading this article.

        How would you go about switching your accounts at this time and not lose further with the market down compared to last year?

        Thanks for any insight.

        Jean

  5. Patrick says:

    I currently use TIAA-CREF and I must say they are a great mutual fund company. They have very low fees and have a good selection of mutual funds. The only problem is that you must be part of a non-profit organization or be a teacher. If you are either, I would check them out.

  6. Nathan says:

    If you’re just starting T.Rowe Price is also a great option for an IRA. If you do monthly contributions there is no minimum starting balance, and monthly contributions of as little as $50/month. There is a annual charge of $10/annually for accounts under $50000.

  7. BrewCrewFan says:

    Since I primarily invest with index funds, I have my IRA with Vanguard. I like the low fees and the wide variety of index funds they offer.

  8. Eric says:

    I am strongly considering opening a Vanguard Roth IRA account, but I want to play devil’s advocate for a minute: If E*Trade offers:

    1. no commissions on no-load mutual funds (which the vast majority of Vanguard funds are)
    2. AND the option to purchase no-load mutual funds from other fund families for no commission
    3. AND the option to purchase stocks with a reasonable commission (much more reasonable the Vanguard’s brokerage services),

    then isn’t E*Trade the better option here because of more investment flexibility with equal access to Vanguard Funds, and low (zero) transaction costs?

    • Eric says:

      Ah ha… I thought this sounded too good to be true.

      After a call to E*Trade’s customer service, I determined that there is only one Vanguard fund that E”Trade offers as a “no-load, no-transaction fee.” That fund is the “Tax-Managed International (VTMGX)” fund. I find this peculiar since the same customer service rep told me that they offer 100-something Vanguard funds. I thought Vanguard’s claim to fame was their extensive selection of no-load funds. What’s the deal?

      Can somebody with an E*Trade account verify what I the customer service representative told me by experimenting with the E*Trade’s Mutual Fund Screener? Thanks.

      • BrewCrewFan says:

        E*Trade also has account maintenance fees (like $40 per quarter) if you don’t make enough trades. As a buy and hold investor, I kept getting hit with inactivity fees on my old E*Trade account. I finally got fed up and closed the account.

        Vanguard does have a network of non-Vanguard no transaction fee mutual funds that you can access, but the number NTF funds in not as robust as other brokerage firms. My other concern with Vanguard is that their on-line research tools are not as strong as other brokerage sites. I previously had my IRA with TD Ameritrade and liked the ease of use of their website.

        If you are going to be an active stock trader with your IRA, Vanguard probably is not the right choice. With my investment approach, it is a good fit for now. I am beginning to utilize ETFs a little more, so brokerage fees and order executiion may become more important in the future.

        Hope this helps.

  9. Thanks for the very valuable info. Scottrade is also another low minimum IRA provider for those looking for low minimum initial investments. They also have lower trading fees than E*Trade (usually $7/trade). I’m not sure about any other fees for IRA accounts though, as I only have a regular brokerage account with Scottrade. For my IRA I use Vanguard.

  10. Paige says:

    Thanks for this helpful info. Neither my husband nor I have an IRA account. I have been looking into them. I am going to check out Vanguard.

  11. Pete says:

    Another good article and thank you, Jim.

    I need to roll over my 401(k) to an IRA.

    E*Trade and TD AMERITRADE currently offer up to $500 cash credit for a Rollover IRA account.

    I understand your comments about ignoring free-trade promotions but up to $500 cash credit promo shouldn’t be ignored, correct? Or is there a different catch somewhere that I’m missing?

    That Fidelity AMEX card also looks intriguing.

    pete

  12. Paul says:

    I just wanted to add that Vanguard has lowered the minimum investment on at least the target retirement date funds to $1,000.

    Edit – I see on another site that 27 funds have been lowered from $3,000 to $1,000.

    • Dave says:

      I have my regular brokerage account at Fidelity and I also use the Fidelity AMEX 2% card. My IRA is at Vanguard.

  13. Dave says:

    My IRA is at Vanguard because of the low cost Mutual Funds.


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