The mobile-first brokerage and (Reddit-legendary) inventory buying and selling platform Robinhood just lately launched a product that nobody noticed coming: Robinhood model IRAs. It was a peculiar selection given Robinhood’s historical past because the primary selection for /r/wallstreetbets-style meme buying and selling and poorly thought out choices trades, however Robinhood’s gone and executed it anyway.
There’s no scarcity of locations to arrange an IRA—most banks, brokerages, and different monetary establishments, as an example—so Robinhood throwing its feathered cap into the ring is type of curious.
Clearly they assume they’ve some distinctive worth proposition or see a possibility to earn money off of their new IRAs, however do you actually need to flip to Robinhood on your retirement planning?
So what’s the take care of these Robinhood IRAs? Are they deal? Have they got some distinctive options or compelling cause for purchasers to spend money on their IRAs, or would customers be higher off choosing an IRA from a extra established monetary establishment?
Let’s dive in. However first, slightly context.
It Stands for Particular person Retirement Account
IRAs, or particular person retirement accounts, are particular funding accounts that assist people save for retirement (therefore the title).
Very similar to 401(okay)s, IRAs are primarily managed funding portfolios that take pleasure in sure tax benefits, although there are some variations.
Whereas 401(okay)s are usually supplied and managed by an individual’s employer, IRAs and the investments they maintain are often managed by their homeowners. There are additionally barely completely different tax implications between 401(okay)s and IRAs, however we received’t get into all that right here.
IRAs are available a number of flavors, although Robinhood solely gives the 2 commonest sorts: conventional IRAs and Roth IRAs.
Professional Tip:
If you join a Robinhood IRA, you’ll get a 1% match for all funds you contribute to your retirement account as much as the legally allowed contribution restrict. Plus, you possibly can earn as much as $1700 per 12 months in FREE STOCK by a Robinhood brokerage account!
Conventional IRA
A standard IRA is basically an funding portfolio which you can contribute sure quantities to yearly.
For 2022 the boundaries have been as much as $6,000 ($6,500 in 2023) for folks beneath the age of fifty and as much as $7,000 ($7,500 in 2023) for folks 50 and above. Word that these contributions apply for all IRAs that you’ve, as in you possibly can solely contribute as much as $6,500 in whole throughout your IRAs, not $6,500 per IRA.
Contributions beneath and as much as the restrict are tax-deductible, as are any transactions and earnings that happen contained in the portfolio. If you retire you possibly can withdraw funds from an IRA and have them taxed as common revenue, although there are extra penalties related to taking out cash earlier than retirement.
Withdrawal Age and Penalties:
You can begin withdrawing cash out of your IRA while you flip 59 and a half.
Any funds that you simply withdraw shall be taxed like common revenue. You’ll be able to technically withdraw funds from an IRA earlier than you flip 59 and a half, however you’ll pay a ten% penalty on high of any revenue taxes you owe.
And whereas there are some circumstances that may allow you to keep away from that 10% penalty, that will get into some thorny tax territory that might be neither helpful nor fascinating to get into.
Roth IRA
Roth IRAs are slightly completely different. They’re structured and administered like conventional IRAs, any transactions that occur and earnings that accrue inside a Roth IRA are additionally tax-free, and you’ll withdraw earnings after retirement with out incurring a tax penalty.
The Distinction:
There are two massive variations between conventional and Roth IRAs.
You’ll be able to’t deduct any contributions you make to a Roth IRA, however you possibly can withdraw these contributions (however not good points) at any time with out incurring a penalty
There are revenue limits related to Roth IRAs
For 2022 you possibly can solely contribute to a Roth IRA in case your revenue is beneath $144,000 for a single individual or beneath $214,000 if submitting collectively
For 2023 the revenue limits are raised to $153,000 and $228,000, respectively
TO SUMMARIZE:
Contributions to a standard IRA are tax deductible, and shall be taxed as common revenue while you take withdrawals throughout retirement. Contributions to a Roth IRA are made with after-tax {dollars} and won’t be taxed while you take withdrawals throughout retirement. You don’t pay taxes in your capital good points or dividend revenue in both account.
Now that we all know a bit about IRAs, let’s speak about what Robinhood has to supply.
Robinhood IRAs
Robinhood Retirement (Robinhood’s IRA program) gives each conventional and Roth IRAs. The method for organising both and/or each is identical: simply choose the Retirement possibility within the menu on the positioning or within the app and comply with the prompts, and earlier than lengthy you’ll have your new account(s) arrange.
How Many Robinhood IRAs Can You Have?
You’ll be able to open one in every of every type of IRA that Robinhood gives even when you’ve got different retirement accounts elsewhere, although you’ll nonetheless must abide by the contribution and revenue limits whatever the sort and site of your IRAs.
Anyway, after you have your IRA(s) arrange you can begin transferring in cash out of your brokerage account and/or exterior financial institution accounts. Should you don’t need to watch for the cash to reach it’s also possible to choose into the IRA On the spot program, which helps you to immediately deposit as much as $1,000 and begin buying and selling when you’re ready on your cash to reach from the financial institution.
That’s all the essential stuff coated. Now let’s speak about a number of the different options of Robinhood IRAs, beginning with the largest one.
Matching Funds
Robinhood’s largest promoting level for his or her IRAs is that they’re prepared to offer a 1% match on each greenback you contribute to one in every of their IRAs. You don’t want an employer or something to obtain these matching funds, they usually additionally don’t rely towards your contribution limits for the 12 months.
You’ll begin incomes the 1% matching funds as quickly as you begin contributing cash to your IRA, however provided that the cash comes from an exterior financial institution, not your Robinhood brokerage account.
It’s not clear why the funds have to come back from an exterior financial institution. Perhaps they need to be sure the cash isn’t simply being transferred round of their system, or perhaps they solely need contemporary new cash as an alternative of the identical previous cash you gave them while you opened your brokerage account. Who is aware of.
Regardless of the case, you’ll solely get that 1% matching funds if you happen to make a contribution to your IRA from an exterior financial institution.
It’s a reasonably good factor for Robinhood to do for its clients. That stated, they solely match 1% of your contributions. That’s a penny per greenback.
In 2023 you possibly can earn as much as $65 or $75 in matching funds if you happen to’re beneath or over 50, respectively. That’s not nothing…but it surely’s additionally not big. Both approach, it’s free cash!
Professional Tip:
If you join a Robinhood IRA, you’ll get a 1% match for all funds you contribute to your retirement account as much as the legally allowed contribution restrict. Plus, you possibly can earn as much as $1700 per 12 months in FREE STOCK by a Robinhood brokerage account!
IRA Portfolios
Should you open an IRA with Robinhood you’ll be given the selection between a pre-built beneficial portfolio or a extra self-directed expertise.
The beneficial portfolios are comprised of 5 to eight ETFs which are chosen by Robinhood’s algorithm based mostly on the solutions you give on a brief questionnaire.
It’s not precisely clear what their standards or methodology are for selecting the ETFs to populate your portfolio, although you possibly can most likely assume it has one thing to do together with your funding objectives, danger tolerance, and whether or not or not you will have ESG-style priorities on your investments.
Should you go to the self-directed route, alternatively, you will have a selection of just about all the things which you can commerce on Robinhood. Meaning you will have an entire ton of shares, ETFs, and choices to select from, but it surely additionally means you solely have shares, ETFs, and choices to select from.
Now, shares, ETFs, and choices are nice. Nobody’s disputing that.
However for the extra risk-averse clientele on the market, Robinhood’s restricted and risky number of securities could depart one thing to be desired. There’s no fastened revenue, no currencies, no various property, nada.
And as a lot as these extra risky property can attraction to youthful traders with larger danger tolerance, an enormous swath of potential traders could select to open an IRA at a much bigger establishment with a extra diverse providing.
Is Robinhood Retirement Protected?
With all of the current commotion across the banking system (we’re you, SVB), you could be questioning: are Robinhood IRAs secure?
Briefly: sure, Robinhood IRAs are secure.
The accounts are backed by safety by the Securities Investor Safety Company (SIPC), which protects your account as much as $500k, half of which could be uninvested money in your account.
Remember the fact that the SIPC doesn’t defend you from shedding cash in case your shares go down in worth. It protects you in case your brokerage fails and you’re unable to say your rightfully owned securities and money in your brokerage account.
Professional Tip:
If you join a Robinhood IRA, you’ll get a 1% match for all funds you contribute to your retirement account as much as the legally allowed contribution restrict. Plus, you possibly can earn as much as $1700 per 12 months in FREE STOCK by a Robinhood brokerage account!
Conclusion
Robinhood’s foray into the world of particular person retirement accounts is fascinating, to say the least. It’s simple sufficient to open an IRA, roll over any current retirement accounts, and handle an IRA utilizing Robinhood, but it surely will not be one of the best place to show on your retirement planning.
Positive, Robinhood’s 1% match is good. It’s greater than most IRA suppliers would offer you.
On the identical time, although, these matching funds additionally include the industrial-sized caveat of not having the ability to spend money on something past equities and choices.
Should you’re okay with being restricted to simply these securities, nice! You’ll most likely have a good time with Robinhood’s IRAs. Should you’re extra keen on having a well-diversified portfolio that doesn’t hinge on a number of the most risky securities on the market, alternatively, you could need to keep away.
Earlier than you belief a brokerage to carry onto your hard-earned retirement earnings till you flip 59 and a half, you may need to get to know them slightly higher. And that’s completely comprehensible.
If you wish to do some extra analysis into whether or not or not Robinhood is secure and dependable, that’s an important thought.
That will help you alongside the way in which, listed below are some articles answering the questions: Is Robinhood Protected? and Is Robinhood a Rip-off? Or if you wish to study extra about how one can earn as much as $1700 per 12 months in free inventory by referring associates, learn our article about Robinhood Free Inventory.
