Which Broker for my Roth IRA?

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I have decided upon Vanguard for my Roth IRA Brokerage. My decision was based upon the following:
1) I want to invest solely in mutual funds, specifically index mutual funds.
2) I want a large selection of no-transaction fee, no-load mutual funds with very low expense ratios.
3) I want minimal fees, especially tricky or hidden ones, from the brokerage.
4) I want it online, with a good web interface.

These points narrowed it down to:
a) Fidelity, a mutual fund behemoth which has a nice selection of in-house funds with expense ratios as low as 0.10%. However, the minimums for those funds are $10,000 each. It also has a great web interface, as I use it for my 401k account.
b) Vanguard, which was a leader in the index fund movement and has an enormous selction, with very low expense ratios. I have no idea what the web interface is like, however.
c) Scottrade, a smaller company which currently has no transaction fees for ANY of it’s mutual funds. However, I have heard through the grapevine that it may start charging soon, as they are currently losing money on each transaction doing this. (Update: They now charge for no-load mutual fund transactions)

Since I already have my 401k at Fidelity and am already invested in many of their mutual funds, and I want to keep my Roth IRA somewhere stable for the long run, I leaned toward Vanguard. After some more research, I saw that many of Fidelity’s index funds have $10,000 minimums, even for retirement accounts. Unfortunately, the max for 2004 IRA contributions is $3k, 2005 is $4k. Thus, Vanguard wins out.

Vanguard has an IRA custodial fee of $10 a year for each fund account having a balance of less than $2,500 to $5,000. I plan to have at least $5,000 total, so I may be exempt from that. Many of it’s funds also have a quarterly $2.50 account maintenance fee for account with less than $5,000 to $10,000. Regarding the account maintenance fee, they say it “is paid directly to the fund and therefore is not considered a load”. So I guess some the $10/year comes back to me, as it pays into the fund. Still, I would be subject to this for at least a year. Not ideal, but it’s better than less my cash sit and shrink from inflation, not to mention $10 is less than one stock trade at most places. So I’m off to Vanguard to open an IRA…

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  1. Excellent choice. I have my Roth IRA with TIAA-Cref (TCEIX, and index fund). I chose them because they have absolutely no account maintenance fees, a low expense ratio comparable to VFINX, and they allowed be to start my initial investment with a payment plan… $125 twice a month for the 2003 max of $3000. With Vanguard I would had to have deposited a lump sum to start off with.

  2. Neat, I didn’t know TIAA-Cref did individual IRAs, I thought they just managed 401k for other educational groups. The lack of account maintenance fees and the ability to simply start with $50 (with regular installments) is awesome. Although it looks like they only have like 10 mutual funds, they seem to have most bases covered. Perhaps they should publicize more?

  3. See, that’s the thing, isn’t it. They would have to spend more money to publicity more. And that advertising and publicity money would have to come from higher expense ratios or maintenace fees…

  4. how about firstrade?

  5. FirstTrade looks good due to it’s free mutual fund transactions, but I question how long that is going to last, especially since Scottrade started charging mutual fund fees. Anyhow, I’ve picked Vanguard and am happy with my decision so far.

  6. Shane Vitarana says

    Jonanthan, did you look into Ameritrade? I recently switched jobs and need to rollover my 401k and pension plans into an IRA. Is there a big difference between getting a Vanguard IRA and getting an Ameritrade IRA with a Vanguard index fund?

  7. Well, you’ll be charged mutual fund transaction fees at Ameritrade, at $17.99 to buy and then to sell as well. Depending on how often you plan on buying mutual funds, that can add up. It’s free at Vanguard. You get more flexibility at Ameritrade, if you like other funds.

  8. What about Vanguard or Fidelity for non-retirement funds? I am thinking of buying index funds outside of my IRA/401k.

    Some require $10,000 minimums on S&P 500 type indexes. Which is better?

  9. I would say they are pretty much even for index funds, until you have six figures or so. They are close competitors and are very similar in many areas. You may want to look into tax-managed funds too, I know Vanguard has some good ones, if you are looking outside of IRA/401k.

  10. I’m been trying to go back and forth between the two – Fidelity and Vanguard. I am actually leaning towrads Fidelity. I perceive the Fidelity has more options. Whether I will use all of them or not is another think. Fidelity will charge a $50 fee when ou close out the account and does have higher expenses – .5-.9%. But Vanguard has a sneaky way of throwing on expenses. The fees they charge are per fund. So if you are just starting an IRA with them it could take a year or more to get to the $10000 limit when fees are no longer charged on the index funds($10 per year). Then the funds charge $10/yr for values less than 5000. So if you want to diversify you are quickly adding up the fees over the first few years until you can contribute a significant amount to the fund. Fidelity will charge 12 per fund under 2500 but this still gives twice the capacity to diversify as Vanguard and still avoid the fees. Fidelity also has the option to put money in CD’s if you are trying to figure out what you want to do (currently around 5%). Again to to this at Vanguard you need $10000 min.

    I think they are both good but I am nerviuos about how Vanguard hides their fees upfront and penalize the new IRA customer.

  11. Just signed up with TIAA-CREF 2040 Lifecycle fund. Hopefully everything works out 🙂

  12. Now that you’ve had Vanguard for a while, are you happy with their web interface?

  13. I am, actually. It doesn’t wow me, but it works well and is reliable.

  14. Vanguard site says: You’ll first have to roll over your assets into a traditional IRA. Then you can convert to a Roth IRA.

    Is that safe? I have a roth ira w/ fidelity and never had to convert anything. Thanks!

  15. Help!
    I want to open a Roth IRA account with Vanguard. I want to start with one for $5,000 for my wife and $5,000 for me. I’m 55 years old
    and won’t be retiring until I’m 62 or older. I’m not planning on touching the money but you never know if I’ll be needing it for an emergency. I don’t know what kind of IRA I should go for,
    I really don’t want to loose my money with a risky investment since I don’t have a lot of time to save (I wish I had started a lot younger!).
    I would appreciate any help from you experts in Roth IRA’s.
    Thanks a lot!

  16. My wife and I are about to open our Roth IRAs. We’re in our mid thirty’s. I have started doing my homework in the stock market. Should I consider a bank or brokerage firm? I like the idea of a brokerage IRA. Does anyone have an opinion on USAA?

  17. I am 21 and just graduated college. I want to open a Roth Ira with Vanguard but with the current economy and people losing money in their IRA’s I am a little hesitant. I want to start with $3000. Is it a good idea to open one now or should I wait and invest my money elsewhere?

  18. Note to David II: Here is the basic idea behind whether you should invest in a Roth IRA. If your tax rate will be lower now than when you withdraw the money, you should invest in a Roth IRA. On the other hand if you are in a higher tax bracket now than what you will be in when you retire, I would recommend a traditional IRA.

    Best of luck!

  19. Is there a cost or penalty to change from a Roth IRA to a traditional traditional one?

  20. Javier– you should invest what you are willing to lose. And when I say this I don’t mean that you will never get it back but more so will you be able to handle a loss right now if it means that you will have big gains in the future. If you invest your $$ now, you are getting in at a time when the stockmarket is low and you can get a lot for your $$. Assuming that the stockmarket will rise again, probably not in teh near future, you will have a nice payoff.

    If you are willing to invest and not touch your $$$ for many years (20-30yrs) and can stomach some ups and down, than invest. But if you are scared of losing your money and cannot handle dips in the market than you should still invest, but just invest in bonds.

    You should read up on cost averaging, compounding and diversifying your portfolio. I am 27 yrs old and started investing in a roth and 401k when I was 22. Trust me when I say that my decision to do is probably going to help me out more than I can even imagine in the future.

  21. William Greenberg says

    MoneyBlogger: Nicely written and informative article. However, please note that “it’s” means “it is” and is not the same as “its,” which is the possessive.

  22. @David – Hi David, Investing in stocks might not be a wise move because you have seven years to retire. Since you are looking for safety and steady income during your retirement rather than aggressive growth, I think you should invest your money in bonds, treasury, and cash reserves. The percentage of your IRA being invested in bonds, treasury, and cash reserves should depend on your individual needs.

    Here are few Vanguard Links that you should check out:

    This website lets you compare various vanguard core funds and decide which one is best for your individual need.

    This website has about 100 different funds for vanguard. You can begin by sorting Asset class and then looking at the individual description of the fund you are interested in.

    I hope this helps!

    Also, please keep in mind Rachel’s suggestion about the tax bracket.

  23. @David – I forgot to mention – Roth IRA or Traditional IRA might not be a good option for you if you are planning to use this money as an emergency fund as well. You have to be 59 1/2 years to withdraw the money without any additional penalty. There are certain conditions when you can withdraw money early from IRA without the 10% penalty. However, the IRA account has to be atleast 5 years old (in terms of tax years).

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