Best Roth IRAs Based on In-Depth Reviews

Roth IRAs: The Basics

Roth IRAs are a type of investment account designed for retirement savings. With a Roth IRA, you get to build your own portfolio or choose a pre-built one (depending on the type of account you get), and invest in a wide range of securities—like stocks, bonds, mutual funds, exchange-traded funds (ETFs) and fixed income securities—that are allocated according to your risk tolerance.

Unlike traditional IRAs, which are funded with pre-tax dollars and where investments grow on a tax-deferred basis, Roth IRAs are funded with after-tax dollars, which means that you won’t have to pay any taxes on any qualified withdrawals during retirement.

One of the main advantages that Roth IRAs have over traditional IRAs is that you’re not required to take the minimum required distributions, so investments can continue to grow even after retirement. You can also contribute for as long as you like, provided that you still earn taxable income and contributions can be withdrawn at any time, without being penalized. However, contributions are not tax-deductible and there are certain income restrictions in order to qualify for this type of account.

Aside from traditional and Roth IRAs, there are also spousal, nondeductible, self-directed, SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) IRAs.

Why choose a Roth IRA?

“When you think about retirement savings, there’s kind of a three-legged stool of where retirement income comes from,” says Gerri Walsh, president of the FINRA Foundation and senior vice president of Investor Education at FINRA.

“One leg of the stool is social security, where you pay in, and then you’re able to extract the benefits when you hit retirement age. For most employees, is not enough to cover all of their needs, to cover all of their expenses each year in retirement, it only replaces a portion of their pre-retirement income. That’s where the two other legs come in: employer-provided savings and individual savings,” she added.

Historically, individual retirement accounts, commonly known as “IRAs,” have served as an alternative option for people without access to an employer-sponsored plan, who want to save money for retirement, or as a supplement to social security benefits and other types of plans. Nonetheless, Roth IRAs are more than just a nest egg for retirement. 

Here are some of the things that can be obtained through this type of account:

• Rainy day fund – one of the advantages of opening a Roth IRA versus a traditional IRA is that you can withdraw your contributions at any time, regardless of your age, tax- and penalty-free. If you have a medical emergency or other unexpected expense and need the money fast, you can always withdraw the contributions in your Roth IRA to avoid getting into debt.

• A more diverse portfolio – unlike 401ks and other employer-sponsored plans where you’re limited to investing in the things available at your company’s portfolio, Roth IRAs give you the freedom of investing in a wide array of securities, including stocks, bonds, ETFs, CDs and mutual funds, with much lower underlying costs to help you maximize your earnings, while having greater control over your asset allocation.

• Bankruptcy and job loss protection – as stated on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, assets in an IRA are protected from creditors if you file for bankruptcy, though the amount is limited to $1,362,800. Additionally, if you lose or quit your job, you can always roll over the funds in your employer-sponsored plan into a Roth IRA, and keep your contributions in addition to any vested amount.

• Tax-free inheritance – another benefit to a Roth IRA over a traditional IRA is that you can let your investments grow even after retirement age and, since the account is funded with after-tax dollars, earnings are tax-free, thereby resulting in a greater amount for your loved ones. However, it should be noted that you must designate an account beneficiary who can access the funds after your death. Beneficiaries don’t have to pay any taxes on any earnings withdrawals if they’ve owned the account for five years.

Investments, Strategies and Restrictions

What makes Roth IRAs, and indeed any type of IRA, an attractive choice for retirement savings is the broad range of investments you have access to. With a Roth IRA, you can diversify your portfolio by investing in:

• Stocks

• Bonds

• Exchange-traded funds (ETFs)

• Mutual funds

• Options

• Futures

• Certificates of deposit (CDs)

• Annuities

• Money market accounts

• Real estate investment trusts (as long as you’re not the owner of the structure or project)

Out of all these options, stocks, bonds, mutual funds, and ETFs are most commonly present in the majority of portfolios.

Stocks are considered by investors as one of the most volatile securities on the market, but because of that, they also offer higher returns than other investment products. When you purchase a stock, you’re basically buying a piece of that company. In Peter Krull’s words, CEO and Director of Investments at Earth Equity Advisors, this means that “you share in their good luck and you share in their bad luck,” since returns will be based on how well the company performs on the market.

Bonds are loans made to private corporations and government agencies. You earn money through regular interest payments, making them a safer option than stocks, but they also offer lower returns.

Mutual funds are programs created by investment firms that allow you to buy shares from a diversified portfolio. Although they offer better returns than fixed-income investments, like bonds, they tend to have higher underlying costs due to the fact that they’re professionally managed.

ETFs are also shares of a diversified portfolio, but these shares can be traded like stocks. Most track an index, like the S&P 500. They have lower underlying costs than mutual funds and a lot of companies offer a variety of them commission-free, making them a good alternative for beginner investors.

According to Morningstar’s 2018 Fundamentals for Investors, the right investment strategy for you will be based on three factors: your goals, time horizon, and risk tolerance. These three things combined will determine your portfolio’s asset allocation or how these investments are balanced.

For instance, if you’re in your early 30s, you’ll benefit more from having a larger share of stocks and other riskier securities in your portfolio, since your investments will have more time to grow and to recover from any losses before reaching the age of retirement. Conversely, if you’re in your 50s, then you may benefit more from having a larger percentage of safer securities, such as bonds and other fixed-income investments, to minimize the risk of losing more money closer to retiring.

While Roth IRAs allow you to invest in many products, there are some investments that are prohibited within any IRA portfolio, as stated by the Internal Revenue Service (IRS), like:

• Life insurance

• Artwork

• Rugs

• Antiques

• Gems

• Stamps

• Metals (except for certain kinds of bullion)

Any amount invested on any of these products could face a 10% tax penalty from the IRS. Additionally, the IRS prohibits investing using margin lending on any type of IRA.

Requirements and Contributions

Just like with traditional IRAs, the IRS requires you to earn taxable compensation, such as wages, tips, bonuses, salaries, commissions, self-employed income, alimony and separate maintenance, in order to contribute to a Roth account. However, unlike contributions made to a traditional IRA, those made towards a Roth are not tax-deductible.

If you have taxable compensation, you can keep contributing to your account for as long as you want, even past the age of 70 ½, but the amount you can contribute will always be subject to your filing status and modified adjusted gross income (MAGI). As of 2019, the maximum allowed contribution is $6,000 or $7,000 if you’re 50 or older.

Qualified Distributions, Penalties and Exceptions

The IRS establishes certain rules for withdrawing money from a Roth account:

• If you’re under the age of 59 ½ you’re always allowed to withdraw any contributions made to the account

• If you’re over the age of 59 ½ you can always withdraw any contributions made to the account, plus any earnings, if you’ve had the account for 5 years or more

If your withdrawal meets those rules, it will be considered a “qualified distribution” by the IRS, which means that you won’t be penalized. Otherwise, it’s considered an “early distribution,” and you’ll have to pay a 10 percent tax penalty on the withdrawn amount, except if the amount was used for:

• IRS levy payments

• Payments towards unreimbursed medical costs exceeding 10 percent of your AGI

• Payments to health insurance premiums during unemployment

• Pay for higher education costs

• First home purchase (with a limit of $10,000)

The IRS will also waive the 10 percent tax penalty if you’re disabled, on active duty, or if the withdrawals are made from an inherited account.

Insurance and Regulations

As previously discussed, Roth IRAs are a type of retirement plan, but they’re also investment accounts. As such, you can open them at financial institutions like banks and credit unions, life insurance and mutual fund companies, or at investment firms.

In order to offer these types of account in the United States, financial institutions must provide insurance either by the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA) or by the Securities Investor Protection (SIPC), and must adhere to the rules and regulations established by the IRS.

If your Roth portfolio invests in banking products like certificates of deposit, savings or money market accounts, those investments are protected up to $250,000 by the FDIC if you have the account with a bank—or by the NCUA if you have it with a credit union. If your portfolio is mainly composed of securities such as stocks, bonds, ETFs or mutual funds, then investments are insured by the SIPC up to $500,000, with a $250,000 cash limit.

Still, it’s important to understand that these organizations only protect your investments in case of fraud or if the company goes under, not in the event of loss of value due to market depreciation.