What Is An IRA?
Are you a US investor looking to invest with a robo advisor? Then you need one that allows you to invest via an IRA. Compare the best IRA robo advisors below, sign up and enjoy generous tax benefits.
| - | Broker | Rating | Fees | Pros | Account size | - | |
|---|---|---|---|---|---|---|---|
| 1 |
 |
Fees: 0.25%
0.45% up to $50,000 |
|
2500
Min. Account Size
Min Account Size
2500
Fees
0.25%
0.45% up to $50,000
|
Invest Now! |
Min Account Size
2500
Fees
0.25%
0.45% up to $50,000
|
|
| 2 |
 |
Fees: 0%
Charges no management fees |
|
5000
Min. Account Size
Min Account Size
5000
Fees
0%
Charges no management fees
|
Invest Now! |
Min Account Size
5000
Fees
0%
Charges no management fees
|
|
| 3 |
 |
Fees: 0.30%
Flat fee for all account sizes |
|
50000
Min. Account Size
Min Account Size
50000
Fees
0.30%
Flat fee for all account sizes
|
Invest Now! |
Min Account Size
50000
Fees
0.30%
Flat fee for all account sizes
|
|
| 4 |
 |
Fees: 0.35%
0.75% for smaller accounts |
|
1
Min. Account Size
Min Account Size
1
Fees
0.35%
0.75% for smaller accounts
|
Invest Now! |
Min Account Size
1
Fees
0.35%
0.75% for smaller accounts
|
In the United States, IRA robo advisors are becoming more common. In fact, we have yet to run across a robo advisor that does not offer an IRA account option. This is good news, as IRAs can be very powerful tools to help you grow your retirement nest egg.
- What is Robo Investing?
- Are Robo Advisors Legit?
- Robo Advisors versus traditional Financial Advisors
- How to Pick the Best Robo Advisor
So, what is an IRA?
An IRA is an Individual Retirement Account that allows income (such as interest and dividends) and capital gains to compound within the account on a tax-deferred basis until the investor is ready to withdraw the funds. It creates a huge tax advantage for the owner as all the money in the account can be dedicated towards growth without having to worry about paying taxes.
One of the biggest misconception about IRAs is that they are investments themselves. IRAs are simply the “wrapper” or basket where you keep all of your investments like stocks, bonds, and exchange traded funds.
Importance Of Taxes On Investment Performance
Before we get into the details, let’s talk about how important taxes are – more importantly, how important minimizing taxes is. Take a look at this table from Investopedia that looks at the difference in value over a 30-year period between a taxable and tax-deferred account. In each scenario, a modest $1,000 starting value is allowed to grow for 30 years.
As you can see, the account that minimizes taxes performs much better than the account that does not. The value comes from allowing your investment dollars to compound within the IRA as opposed to being paid out as the investment gains are realized. By managing taxes appropriately, an investor can be left with a lot more money to fund their retirement.
Two Primary Types of Individual Retirement Accounts:
Although there are a few different types of Individual Retirement Accounts available to U.S. investors, the two primary types include the Roth IRA and the Traditional IRA. When you are looking into IRA robo advisors, it is important to understand the difference so you are sure you are setting up the right one.
Let’s define each type of IRA, and then get into the main differences between the two.
The Roth IRA
A Roth IRA is a retirement savings account that is tax protected, meaning that the retirement savings within the Roth IRA can grow tax free. Any capital gains, dividend income, or interest will not be liable for tax.
Roth IRAs are funded with after-tax dollars. What this means is that you have already paid tax on the money you receive into your bank account, so the money you contribute into the Roth IRA is not subject to further tax while it stays in the account.
The added benefit of a Roth IRA is that there is no tax even when you withdraw funds at retirement. This is obviously a great benefit as every dollar you earned within the Roth IRA is yours to keep.
A Traditional IRA
Like a Roth IRA, a Traditional IRA allows money to grow within the account tax free. By deferring taxes, all of the dividends, interest payments, and capital gains compound each year without being impeded by taxes. This allows the Traditional IRA to grow much faster than a taxable account.
There are two types of Traditional IRAs, each with slightly different tax treatment.
The deductible Traditional IRA means that an amount of money you put into the Traditional IRA is deducted from your overall income. It can reduce the amount of tax you need to pay in a given year because of the tax credit applied to your income.
The non-deductible Traditional IRA does not allow for the same deduction. It still allows you to grow your money within the account in a tax-free manner, however you don’t get the added benefit of the tax deduction on your IRS tax return.
The ability to use a deductible Traditional IRA depends on your income level, participation in a workplace retirement plan, and marital status. If in doubt, work with your tax accountant or speak to a IRA robo advisor firm and they should be able to clarify that for you.
A Comparison: Roth IRA Versus Traditional IRA
Even with the descriptions of both the Roth IRA and a Traditional IRA, there are a number of other key differences between the two types of accounts. Again, it is a good idea to understand the difference so you can work with your IRA robo advisors to make sure you select the right account type.
In order to help with this, we have prepared the following table to summarize the key differences. However, it is important to make sure you check with the IRS or tax accountant to make sure all the rules and eligibility requirements apply to you.
Other Types Of IRAs
There are a few other types of IRAs available to investors. These are less common and more restrictive; however, they are worth mentioning.
The first is a SEP IRA. A SEP IRA is similar to a Traditional IRA, but is meant for self-employed individuals or small business owners. They have a higher contribution limit – up to 25% of income or $54,000 – which means that the user is able to tax protect more of their income.
The second is a SIMPLE IRA. A SIMPLE IRA, or a Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. What differentiates a SIMPLE IRA from a SEP IRA is that employers are required to make contributions on the employee's behalf. This can be in the form of a dollar-for-dollar match of up to 3% of salary, or a flat 2% of pay even if the employee decides not to contribute to the account.
How Should I Invest Within An IRA?
Investing your money within a Roth IRA or Traditional IRA (or any retirement account for that matter) should be done with a well-researched diversified portfolio, that is matched up exactly with what your needs are from a risk management and time horizon perspective.
IRA robo advisors are a great option for individuals looking to open an IRA because they utilize modern portfolio theory to build a portfolio with a good asset allocation. Rather than investing in individual stocks and bonds, you can use a robo advisor to automate your investing.
When you sign up for an IRA with a robo advisor firm, they will ask you to complete an in-depth questionnaire that will tell them what your level of risk tolerance is, how long you are looking to invest the money for, and what you are actually saving for. With this information, the robo advisor will fully automate the investing of your IRA funds into a portfolio of exchange traded funds that balance the right level of risk for the portfolio growth you are looking for.
IRA Robo Advisor Options
In the United States, there are a number of robo advisors that offer both Traditional IRA and Roth IRA accounts.
Schwab Intelligent Portfolio: Schwab Intelligent Portfolios builds, monitors and automatically rebalances a portfolio of low-cost exchange-traded funds. They offer both Roth IRAs and Traditional IRAs, and have $0 advisory fees, account service fees or commissions.
Vanguard Personal Advisor Services: Vanguard Personal Advisor Services combines IRA robo advisor service with a personal advisor to help manage the investor’s needs. Vanguard offers both Roth IRAs and Traditional IRAs, but requires a $50,000 minimum investment.
Wealthfront: Wealthfront is a robo-advisor that has low fees and automated investing, and offers both Roth IRAs and Traditional IRAs. One of the largest robo advisors in the U.S., they specialize in tax efficient portfolio management.
Betterment: Betterment is one of the easiest to use IRA robo advisors, has no minimum deposit, and costs 0.25% annually. They also offer human advisors who can assist with your IRA accounts.
All of these U.S. based IRA robo advisors are good alternatives if you are looking for a technologically based automated investing system. When signing up, you will have the option of what type of account to open – a taxable or non-taxable account like a Roth IRA or a Traditional IRA. If you are eligible, then we recommend going down the non-taxable route as it can save you thousands of dollars in taxes over the life of your portfolio. Just make sure you understand the rules and always check with the IRS or tax accountant before making a final decision.