The Best Guide for Choosing IRA Accounts For Beginners

Opening an Individual Retirement Account (IRA) is an important way for you to start funding a comfortable retirement and to help prevent you from outliving your money. If you don't have a 401(k) retirement plan at work, an IRA is essential. No less beneficial are the tax-deductions for qualified deposits to traditional IRAs or the tax-exempt earnings you can receive in retirement (from Roth IRAs 5 years old or more).

If April 15 is bearing down on you and you are looking for tax savings, opening an IRA starts to look pretty good even in the near term: For your 2019 taxes based on 2018 earnings, you may stash $6000 ($7000 if you are over 50) in an IRA and, depending on your income and tax bracket and whether your state has an income tax, you may realize enough savings from tax deductions to offset the cost significantly—as much as $1000 or more.

Traditional or "retail" investment brokerage firms (e.g. UBS, Merrill Lynch) still exist, but they now emphasize service. They provide investment advisors, experts on investing – supported by the firm’s analysts who evaluate the viability of every investment with a steady stream of relevant up-to-date data – who build a relationship of trust and understanding with you, the client, to make investments on your behalf. Retail investment brokers represent themselves as someone on your side, holding your hand as it were, as they facilitate your way as effectively as possible through the complex, sometimes volatile world of investing. \

For such personalized service, the retail investment firms charge the highest fees and commissions for transactions they make. These firms are best suited for those who prefer to let someone with the demonstrated expertise advise and make recommendations on what and when to buy or sell.

The retail broker, these firms emphasize, removes the burden from you of becoming an expert and devoting time you do not have to investigate, evaluate, and make transactions that will improve the likelihood of steady growth of your IRAs investment portfolio.

Discount brokers today are offering clients more assistance than ever before, using seminars and webinars to disseminate information about the market that makes it more understandable and, hence, more accessible. Popular discount brokers are Fidelity and Vanguard.

The purpose of discount brokers is not to hold hands like the retail broker who may have the discretion to make investment decisions but to support those who prefer being self-directed. The relationship of a client with a discount broker is based on an active partnership, on the client doing some homework first.

Browse the brokerage sites to see what online DIY (do it yourself) money-management tools they are offering. If you are comfortable with online accounts and financial services having your financial information, you may also want to use tools at sites like Mint.com.

Traditional brokers will want to see an overall investment portfolio of at least $250,000 in order to initiate such a relationship. Personal services are expensive to provide and there has to be enough potential trading activity to justify opening the account. Exceptions are made, of course, as for family members, or where there might be commercial or investment banking relationships to be courted.

If you want a more hands-on approach to making your investment decisions, a discount brokerage firm (e.g. Ameritrade, Charles Schwab, Merrill Edge, etc.) may be right for you. Most offer both traditional and Roth IRAs – and you can usually open them online. Schwab.com, for instance, boasts that you can open an IRA online in about 15 minutes and then takes you step by step through the process. 

Banks offer IRAs. Like discount brokers, they provide clients self-directed investment accounts in which the institution may provide clients research and analysis, but its fee is not earned from providing investment advice. Clients choosing self-directed investments are on their own. Increasingly, however, banks are providing retail brokerage services with expert financial advisors managing your investments for a fee that can take the form of a percentage of your assets. In addition, the convenience of arranging automatic monthly deposits to your IRA from your checking account may be a way to guarantee that you'll actually fund the account regularly, and if you're uncomfortable with putting your personal financial information online, you may feel safer starting with your familiar bank. As you continue your financial education, you can always find out how to move your IRA money or combine accounts in the future. 

Financial trust companies, or independent retirement custodians, that manage large pension funds and alternative assets also offer self-directed IRAs. They hold private equity, real estate, notes, and other non-exchange traded assets (e.g. crowdfunding: funding projects or ventures from many people) as well as stocks, bonds, and mutual funds. Alternative assets provide self-directed IRA clients greater diversification that could include industries or areas of investment in which they have knowledge and expertise. While trust companies boast the potential benefits of alternative asset investments, they state unequivocally that they do not provide investment or tax advice.  As custodians, they administer investments as a third-party provider. To invest in a self-directed IRA with them, you do your own homework and rely on your own expertise. For a beginner, though, this may not be the place to start. 

Regardless of the type of institution with which you open your retirement account and what kind of account you choose (there are in fact 11 types of tax-advantaged accounts; the most common being traditional and Roth IRAs), you should ask how they charge fees and commissions at the outset; the exact charges will vary based on the volume of your transactions or on the size of your assets under management.  

Many financial institutions are qualified to offer IRAs—banks, investment firms, and pension companies. Where they differ is in the degree to which they may inform, counsel, guide, and facilitate you in investing commensurate with your tolerance for risk, and also what they charge you for their services.

The U. S. Securities and Exchange Commission has a useful site that you may want to bookmark. Among other helpful bits, it says, “Brokers and investment advisers offer a variety of services at a variety of prices. It pays to comparison shop.”

Disintermediation is the process of cutting out the middlemen, which is what technology did to the brokerage business in the 1990s. Over a short period of time, instead of trades being executed on the floor of the stock exchange through a chain of individual brokers, clerks, and floor traders for several hundred dollars each, it became possible for individuals to enter the order to buy or sell directly through discount brokers for $6 or $8, with all of the record keeping done with computers. A similar change is underway for fund and asset management fees, with robo-trading and robo-advisors moving to the forefront. 

Generally, an institution providing hands-on service with the authority to make transactions on your behalf will charge more because they are doing for you what you choose not to do yourself. Discount brokerage firms are just that: discounted commissions for clients who self-direct their investments. The merits of each depend on the expertise of whoever makes the investment decisions and, always, on the state of the market.

Beware of the fees and do your homework. Fees are not inherently wrong, but you should be aware that they will cut into the growth of your portfolio. If you are being charged 2.5% of the assets under management and the market is galloping ahead at 15%, you might think the net 12.5% a pretty good return, and it is. But the management fees will be charged whether the market is up or down.