How to Manage Your IRA

Know what you’d like to own

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

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

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.

• 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.

• 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.

Fidelity is challenging Vanguard for IRA dollars where it counts — fees.

• 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.

Traditional and discount online brokerages

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.

• 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.

• 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.

Charles Schwab offers just about any financial service, including its own robo-advisor.

• 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.

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

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.

• 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.

• 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.

Betterment offers robo-advisor services and lets you set the level of automation.

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.