Readers often ask me where they should open a Roth IRA, so I thought it’d be worthwhile to tackle the question here on the blog.
Generally, my answer is as follows: “Vanguard or TradeKing, depending upon your situation.” [Quick note: If you're curious if I put my money where my mouth is, the answer is yes. My own IRAs are with Vanguard, and my wife has her Roth at TradeKing per my suggestion.]
The reason those two brokerage firms are my favorites is that they both have all the things that I think are most important in a brokerage firm. Specifically:
- No account maintenance fees (as long as you opt for email statements)
- Excellent customer service
- Low-cost investment options
- Access to enough different investments to build a sufficiently diversified portfolio.
Between the two of them, in my opinion, the decision comes down to three questions:
How hands-on are you?
If (heaven forbid) you’re into picking stocks, timing the market, or any other such nonsense, you’ll want to open an IRA with TradeKing. With Vanguard, you’ll be restricted mostly to index funds, and Vanguard reserves the right to close your account if you trade too frequently.
If, however, you’re a long-term, buy & hold investor like myself, either company should be just fine in terms of investment options.
How much are you investing?
If you’re just getting started, and you have less than $3,000, TradeKing is going to be your only option for the most part, as nearly every Vanguard fund has a $3,000 minimum initial investment.
Which will cost less?
If you have more than $3,000 to invest, and you’re a long-term investor, the question comes down primarily to cost:
- With Vanguard, you won’t have to pay any commissions to invest in their funds.
- With TradeKing, you’ll have to pay a $4.95 commission each time you invest, but you’ll be able to buy ETF versions of index funds (which have lower annual expenses than Vanguard’s open-end index funds).
As I mentioned a couple weeks ago, the question of whether a Vanguard account or a TradeKing account (made up of ETFs) will cost less is a function of how much you’re investing, and how long your holding period is.
- The longer you expect to hold your funds, and
- the more you’re investing each period,
…the more likely it is that ETFs (at TradeKing) will cost less than open-end index funds (at Vanguard).
Open a Roth IRA Now
Here’s the link to open an IRA at Vanguard.
Here’s the link to open an IRA at TradeKing. (The second page is where you’ll select what type of account you want–Roth IRA, Traditional IRA, etc.)
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{ 13 comments… read them below or add one }
I helped open up an account for both my brother and wife at T. Rowe Price. They meet all your main requirements PLUS have tons of Mutual Funds you can choose from with no minimum as long as you sign up for a monthly investment.
My big complaint with T.Rowe Price is that their funds are comparatively high priced. (Target retirement funds have roughly a 0.7% expense ratio, and their S&P 500 index has a 0.37% expense ratio. That’s roughly twice what you’d be paying at Vanguard.)
That said, I can see that making a lot of sense for somebody who is starting very small (investing, say, $50/month with no initial lump sum) in that they wouldn’t have access to Vanguard, and a $5 commission on a $50 investment each month would kill their returns.
Also in their favor: I’ve heard good things about their customer service. (Though I’ve also heard good things about Fidelity’s, and in my experience when I had my 401k there, it was pretty bad. So I imagine that comes down to personal preference somewhat.)
Vanguard’s STAR Fund might be a good choice for someone with limited funds. It requires a minimum investment of $1000 and gives you immediate diversification including a dollop of internationalequites (~60% stocks/40% bonds);
https://personal.vanguard.com/us/FundsSnapshot?FundId=0056&FundIntExt=INT
It’s a good fund for anyone who doesn’t want to spend much if any time with their investments. The Expense Ratio is fairly reasonable at 0.32%, but it does have an annual fee of $20 for accounts below $10,000.
I have the STAR fund from Vanguard in my Roth IRA.
To correct what Carlyle said above, there is no 20 dollar maintenance fee if you have the fund in an IRA. Furthermore, if you opt for Vanguard’s electronic delivery method, they will waive it anyway.
You can open an account with the Hodges fund for $250.
You really do not have a lot of excuses not to invest.
Vanguard has so many choices for the investor When you get up to the Vanguard minimum you can transfer your fund from hodges to Vanguard.
Does anyone know the best place to open an Individual or Solo Roth 401K?
Hey Mike I bought your book Investing Made Simple from Amazon!
Kind regards, Mike
Hi Capt Mike.
Fidelity’s solo 401(k) looks pretty good to me–no set-up fees or annual fees. And I believe you’d have access to Fidelity’s super low-cost Spartan index funds.
And thanks for buying my book!
Mike you are welcome and we found the book Investing Made Simple helpful.
I appreciate the reference to Fidelity however, I believe that is for a SEP 401K which is a different beast from what I am loooking for, the Solo or Individual 401k. T Rowe Price offers the Individual Roth 401K but I would be limited to their funds. I was hoping to find someone offering an Individual Roth 401k that would permit me for example to invest in Vanguard.
Kind regards, Capt. Mike
Capt. Mike:
To the best of my knowledge, there’s no such thing as a “SEP 401(k).”
Fidelity simply calls their solo 401(k) a “self-employed 401(k).” If you look at the contribution limits and so on, you can see it’s just a solo 401(k) that they’re talking about. That said, I don’t think they offer a Roth option with it.
As to being able to invest specifically in Vanguard funds, you’d have to go through Vanguard or a discount brokerage firm (where you could buy Vanguard ETFs). Last I checked, Vanguard’s solo 401(k) charges an annual fee of $20 for each fund in the plan. (And it does offer a Roth option.)
From what I’ve seen, most discount brokerages charge rather large fees for a solo 401(k). For example, TradeKing charges a $350 annual fee. That said, there may be some discount brokerage out there that charges no fee. Couldn’t hurt to shop around.
Hi Mike,
Thanks for the info…its been awhile since I have done my homework on the 401k stuff but I think I am correct w/ regard to the SEP 401K and the Solo being differnt animals. See for example: http://www.kiplinger.com/columns/ask/archive/2007/q1217.htm
I will do some more research to see if I can find a low cost admin for the Solo or Individual Roth 401k or may be we should think about doing the 401K without the Roth and if our situation changes maybe we could just roll it into a Roth at a later date?
If any readers can help us find what we are looking for we sure would appreciate it.
Kind regards, Capt. Mike
That Kiplinger article is regarding SEP IRA as compared to a solo 401(k). And they, most definitely, are different things. Here’s an article I once wrote on the topic. Often, a SEP IRA is simply referred to as a “SEP.”
In terms of terminology:
SEP = SEP IRA
Self-employed 401(k) = solo 401(k) = individual 401(k)
On the topic of going for a Roth 401(k) as opposed to a regular 401(k), here’s an article from The Finance Buff that makes a compelling case against the Roth.
Oh…Ok got ya no SEP 401K but rather SEP IRA. First rule of investing I have to be able to read?
Thanks Mike.
This article is helpful. http://online.wsj.com/article/SB10001424052748704039704574616230013475734.html?mod=googlenews_wsj
If I find a company that meets our needs w/ regard to this I will post back.
Have a GREAT day!
Capt. Mike
Haha. Happy to help clear things up.
And yes, please do post back if you find other low-cost options for a solo 401(k)….or whatever it’s called.
Perhaps it’s worth a post. With regular IRAs (and SEP IRAs, actually), it’s generally the case that there will be no account fee. With solo 401(k) plans, shopping around is probably much more beneficial due to such a wide range of fees.