Where Should I Open an IRA?

One of the most common questions I receive from readers is where to open an IRA. But the last time I directly addressed that question here on the blog was more than two years ago, and much has changed since then. (Most importantly: A number of companies have improved their low-cost offerings.)

My Favorite: Vanguard

As we’ve discussed several times, I personally prefer to invest with Vanguard because of their ownership structure. This structure (where the company is owned by the funds it runs rather than by outside shareholders) reduces costs and minimizes conflicts of interest between the company and its clients.

In addition, Vanguard’s all-in-one funds — both Target Retirement and LifeStrategy — are the best hands-off solutions I’ve found for most retail investors. (It’s important to note, however, that for people investing via taxable accounts rather than IRAs, all-in-one funds are generally not the most tax-efficient choice.)

Other Low-Cost Brokerage Firms

But, as great as Vanguard is, there are several other good choices, any of which could be a better fit for you depending on circumstances. For example, you may want to open an IRA with one of the following brokerage firms if you care about having an office nearby or if you already have an existing brokerage/checking/savings account with one of them.

Fidelity: Their Spartan index funds are super cheap and can be used to easily build a low-cost diversified portfolio. Alternatively, if you’re just getting started and cannot meet the $10,000 minimum initial investment for the Spartan funds, you can put together a portfolio using a few of the low-cost iShares ETFs that Fidelity offers on a commission-free basis.

Charles Schwab: Their relatively new line of ETFs have very low expense ratios and can be bought in a Schwab account without paying any commissions.

TD Ameritrade: They offer commission-free trades of more than 100 ETFs, including most of my favorites from Vanguard. And for investors just getting started, TD Ameritrade has the advantage of having no minimum initial investment for opening an IRA.

Wells Trade (Wells Fargo’s discount brokerage operation): They offer 100 commission-free stock/ETF trades per year if you link your brokerage account to their “PMA Package,” which as far as I can tell is basically a checking account that has a $30 annual fee unless you have a combined balance of $25,000 between 1) the checking account, 2) your brokerage account(s), and 3) 10% of your outstanding Wells Fargo mortgage.

Opening an IRA with a Bank or Credit Union

Alternatively, the best place to open an IRA may not be a brokerage firm at all. If you plan to have your Roth IRA do double-duty as your emergency fund (because Roth contributions can be withdrawn free from tax and penalty at any time), you’ll want to keep it in something very safe. The offerings from banks and credit unions are a natural fit for such a situation.

For example, writer Allan Roth recommends using Ally Bank’s 5-year CDs for this purpose because they usually offer a relatively high rate of interest, and you can get your money out at any time prior to the 5-year maturity date with just a small penalty (60 days’ interest).