More IRA Options For Those Starting Out

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I listed one good IRA option yesterday for those that are just starting out saving, but now I want to spend some time and explore more options. I don’t want it to seem like I favor Fidelity – people were asking for a good option and I threw one out there. Maybe not the best, but again, sometimes just starting is more important. Besides, you all know that my own retirement money is at Vanguard. 😉

For the purposes of this comparison, I am assuming that we are talking about a person who does not have a lump sum to invest, but can manage to set aside $200 a month towards an IRA. For those that think that’s too little to start, consider this: Just $200 a month, starting from age 25, growing at a tax-deferred 8% annually, will grow to about $1,000,000 by age 70. For simplicity of comparing investment choices, I will also compare each broker’s auto-pilot retirement funds.

Already discussed here yesterday. Their Freedom 2045 fund (FFFFX) has an expense ratio of 0.79%. This is on the high side, and is mostly because the fund consists of several actively-managed funds. Still, Fidelity has tons of selection and solid customer service.

First of all, it has a minimum initial opening balance of $3,000. So in my scenario you can’t even get into the game. If you do manage to save up that much, for IRAs, you have a $10 annual fee for each fund with a balance of less than $5,000. Say you put in $3,000, that’s like an extra 0.33% annual expense ratio. Still, their Target 2045 Retirement fund (VTIVX) has a rock-bottom expense ratio of 0.21% and Vanguard is my broker of choice if you have enough money. No annual maintenance fees.

Not everyone knows this, but anybody who is otherwise eligible can open up an IRA with TIAA-Cref and invest in their mutual funds. You don’t have to be a teacher or work for an educational institution. The usual minimum initial investment for IRAs is $2,000 per fund account. But, you can get around this by setting up an Automatic Investment Plan of $50 per fund. They have a smaller fund selection than Fidelity or Vanguard, but they now offer their own auto-pilot retirement funds. Their Lifecycle 2040 Fund (TCLOX) has an expense ratio of 0.61%. No annual maintenance fees.

T. Rowe Price
Another large mutual fund house, you’ll need $1,000 to open an IRA account here. A $10 fee per year is charged for each IRA mutual fund account under $5,000. Their Retirement 2040 Fund (TRRDX) has an expense ratio of 0.84%. You can set up future automatic investments with a minimum of $50 per month.

Discount Stock Broker ($5-$10 per trade)
You can also go out an open an IRA at a stock brokerage and buy some ETFs every so often. You probably wouldn’t want to do it more than quarterly since those trade commissions will add up fast. So let’s say you save up $200 a month and every quarter you buy just 1 ETF with it, at $5 a trade. That’s like having a 2.5% front-end load on your ETFs, although you won’t have to pay any ongoing fees later. While many ETFs have a bit lower expense ratio than their mutual fund counterparts, I don’t know of any ETFs of auto-pilot retirement funds. You’ll also have to remember to execute the trades yourself, unlike with an automatic investment plan. Most brokerages now offer IRAs with no annual fee.

FirsTrade (Discount Mutual Fund Broker)
Another option is FirsTrade, which actually offers no-load mutual fund trading with zero commissions with an initial minimum investment of $500 and additional investments of at least $100. Still, you must still satisfy the minimums of each mutual fund itself. For example, you won’t be able to get around the $2,000+ TIAA-CREF or Fidelity minimums since you aren’t using their automatic investment plans. This shouldn’t matter, but a $19.95 fee will be applied to redemptions of no-load fund shares held less than 180 days. No annual maintenance fees.

My main concern with this broker is the ongoing feasibility of offering free mutual fund trades. Scottrade also did this for a while, but couldn’t keep it up and had to cancel their program abruptly, leaving people with positions in mutual funds they could not longer add to without incurring high transaction costs. Still, this way you get to choose from a ton of mutual funds.

While there are other options out there, I think these are most of the big guns. I also realize that different mutual fund companies construct their 2040 funds differently, but again, I’m just trying to make the initial choices as simple as possible.

In the end, I would say that TIAA-CREF is the best low-cost choice, with the lowest funding requirements, although Fidelity still isn’t that far off. I hope I didn’t kill you all with too many options.

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  1. The extra .33 ER for that vanguard fund will decrease over the next 7 years (as money grows with your aforementioned %8-.33ER) and then disappear in year 7 when you hit 5k. It’s much more appealing with that in mind.

  2. Yeah, but still you need to $3k to start. Vanguard keeps it fair though, and rewards you as you grow your balance.

  3. Another option I would suggest for someone “starting out” is to buy I bonds monthly and automatically.

    – you can set up auto-purchases

    – the rates aren’t bad

    – no fees

    – in 1-2 years you can build a sizeable egg and during that time learn about equity & fund investing

    I’ve seen a lot of people jumping into equities and funds without know what they are doing, getting, burnt, and never getting back in.

  4. jonathan, i have the expense ratio for the fidelity freedom 2045 at .08% per yahoo finance. and you are saying .79%. is the yahoo just a typo you think?

  5. Don’t forget that those who don’t meet the $3000 minimum for most Vanguard funds could still start with Vanguard’s Star fund (VGSTX).

    It has a $1000 minimum, 0.36% ER, and basically provides a 60% stock allocation. Then, after they’ve accumulated $3000, they could switch to a different Vanguard fund, such as your target fund.

    – Dan

  6. I do have to admit, Fedility does have pretty good customer service. Although, I just started a Roth yesterday with them they seemed very helpful. I’m still trying to get a feel for how I should be investing. The CSR said that the 2040 Freedom Fund is basically set to start agressive then taper off as the years go on. Does anyone have any suggestions on strategy? I’m in my early 20’s.

  7. And if I could spell it may help me out later in life. Sorry *Fidelity.

  8. j.bogle – I believe the varying ER’s listed for a lot of Fidelity’s funds can be explained by this disclaimer from Fidelity:

    “The fund’s investment adviser has voluntarily agreed to limit expenses. Without the adviser’s reimbursement of some expenses, the fund’s total return and yield would be lower. A fund’s expense limitation may be terminated at anytime, unless otherwise stated.”

    I think this is also why Fidelity’s Spartan index funds temporarily have a lower ER than equivalent funds from Vanguard. The official ER is actually higher, but they are currently only charging a lower ratio that can be terminated at any time in the future.

  9. bogle – I believe the Yahoo data is a bit old, and it only covers the extra layer of expenses that the fund of funds adds on the expenses of the underlying funds. (say that 10 times fast)

    For example, I think Fidelity used to tack on an extra .08% on top of the underlying funds. It has since removed that due to pressure from Vanguard and others.

    If you look at VTIVX on Yahoo, the expense ratio is 0.00%. That is because Vanguard did not and does not charge an extra layer of expenses on top of the underlying funds. The weighted average of the expenses of the underlying fund is .21%, as listed on Morningstar and their own website.

    Hope that made sense.

  10. Etrade also has a no-fee IRA option. Their brokerages accounts have some huge inactivity fees, but the IRA doesn’t have account fees.

  11. Off-topic question:

    Have you had any trouble getting on to the site this week?

  12. For those with some sort of military affiliation:

    USAA has a program called “InveStart” which allows you to invest in a selection of their mutual funds with transaction minimums of either $25 or $50 (depending on the fund.) No account minimums as long as automatic investing is used.

  13. It is a shame that Vanguard raised their IRA minimums. It used to be $1000 minimum for IRA, except the STAR fund which (I think) was $250. Now, all their funds are $3000 minimum, except the STAR fund which is $1000 minimum.

    What one can do is put the $200 per month, or whatever one can afford, in savings until you get the $1000. Open the IRA and put it in the STAR fund, but put the monthly contribution into the STAR fund. Then, when you get up to $3000, move it elsewhere. However, once you get over the $1000 hump, Vanguard’s automatic investment plan (AIP) is only $50 minimum per transaction.

  14. you can have more than one Roth IRA right? Like if I have one with Fidelity, I can still open one with Vanguard?

  15. Yep, you can have as many as you want.

    Good call on the STAR fund guys, I am not familiar with that fund. It’s like a restauarant ‘special’, a sampler platter of funds.

  16. Hey Jonathan,

    I was wondering if you know anything about this Green Century Funds. The idea of socially and environtmentally conscious investing appeals to me, but I know absolute jack about IRAs so I’m skeptical.

    To illustrate my ignorance, I shall ask you, why is it better to put your retirement money into an IRA, with risks involved, rather than leaving it sitting in the highest-rate savings account of the day?

  17. Is investing in these Freedom funds or other fund of fund really a wise idea? When you buy these funds you are paying fund expense ratios twice. You pay the “Freedom” fund expense ratio, and then all the funds the “Freedom” funds holds have their own expense rations as well.

    Unless the fund of funds quotes an expense ration that includes the expenses of the underlying investments, it seems to me by simply looking at the expense ration of the “Freedom” fund itself you are not getting the true price.

    It seems to me this is a good way for fund companies to hide the true cost of expensive funds by having them included within a larger fund.

  18. The Vanguard Target Retirement and Fidelity Freedom ‘Funds of Funds’ do not charge an expense ratio of their own. The correct expense ratios are easy to look up at or their respective sites, which do include the weighted expense ratios from the underlying funds.

    Whether it is good to invest in one of these versus something else, that is always debatable, but if you’re only talking about a few hundred dollars a month, I think they are alright.

  19. How does Ameritrade or a similar broker compare to going to a Vanguard or Fidelity directly? Do you get hit for more fees that way?

  20. Can someone explain Expense Ratio. Here’s the situation. If you have an Fund of funds that is at a .08% expense ratio with a 3yr at 19% and a Low Priced Stock Fund with a .94% expense ratio, but a 3yr of 26.85%. Would that last choice be worth it with that expense ratio? What do you guys think?

  21. Laura,

    The last choice is not worth it if you’re investing for retirement. Low Priced funds are a marketing ploy. If a stock is at $20 and the company does a stock split, then it’s at $10, but you have twice as many shares. It may then be “low-priced”, but it’s the same stock.

    For retirement, you’re best off looking at at least 10yrs of data. In the long run, most actively managed funds don’t outperform the index for their class. The last three years of returns have been great because the period began at the bottom of the economic cycle. In the long term, I doubt the LP fund will beat a Value index fund. Low-expense index funds are always the way to go when investing for the long term.

  22. >

    Posted by: Micah at February 20, 2006 11:11 AM


    Posted by: Jonathan at February 20, 2006 11:31 AM


    My comment: I believe you are only allowed $4,000 total per year as an allowance into a Roth IRA. Meaning, yes you can have more than one IRA, but no more than $4,000 per year. My understanding.

  23. So TIAA-CREF has no “low balance” fees? Even if your balance drops below $2000 b/c you have withdrawn some of your contributions or if you stop funding your account with automatic payments before reaching $2000?

  24. My credit union offers IRAs which can be opened with as little as $25. Do you know anything about credit union IRAs, and would your recommend one over another institution?

  25. Depends, at many credit unions all you can invest in is a CD with their IRAs, that’s why the minimums are so low. If you’re really saving for retirement, you’re going to have to invest in something that can beat out inflation and grow.

  26. Regarding Fidelity Freedom Fund expenses: There is no operating expense for the freedom fund itself. The published expense ratio for each fund is the weighted average of the expenses of the underlying funds. Details are in the online Freedom Funds Prospectus here:


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