The mobile-first brokerage and (Reddit-legendary) inventory buying and selling platform Robinhood lately launched a product that nobody noticed coming: Robinhood model IRAs. It was a peculiar alternative given Robinhood’s historical past because the primary alternative 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 sort 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 to your retirement planning?
So what’s the cope with these Robinhood IRAs? Are they a great deal? Have they got some distinctive options or compelling purpose for purchasers to spend money on their IRAs, or would shoppers be higher off choosing an IRA from a extra established monetary establishment?
Let’s dive in. However first, a bit of 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 basically 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 normally managed by their homeowners. There are additionally barely totally different tax implications between 401(okay)s and IRAs, however we gained’t get into all that right here.
IRAs are available in a number of flavors, although Robinhood solely presents the 2 most typical varieties: 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 may earn as much as $1700 per 12 months in FREE STOCK by way of a Robinhood brokerage account!
Conventional IRA
A standard IRA is actually an funding portfolio which you could contribute sure quantities to yearly.
For 2022 the bounds had been as much as $6,000 ($6,500 in 2023) for individuals below the age of fifty and as much as $7,000 ($7,500 in 2023) for individuals 50 and above. Observe that these contributions apply for all IRAs that you’ve, as in you may 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 may withdraw funds from an IRA and have them taxed as common revenue, although there are further 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 can be taxed like common revenue. You possibly can 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 may be neither helpful nor fascinating to get into.
Roth IRA
Roth IRAs are a bit of totally different. They’re structured and administered like conventional IRAs, any transactions that occur and earnings that accrue within 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 large variations between conventional and Roth IRAs.
You possibly can’t deduct any contributions you make to a Roth IRA, however you may withdraw these contributions (however not beneficial properties) at any time with out incurring a penalty
There are revenue limits related to Roth IRAs
For 2022 you may solely contribute to a Roth IRA in case your revenue is below $144,000 for a single individual or below $214,000 if submitting collectively
For 2023 the revenue limits are raised to $153,000 and $228,000, respectively
TO SUMMARIZE:
Contributions to a conventional IRA are tax deductible, and can 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 beneficial properties 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) presents each conventional and Roth IRAs. The method for organising both and/or each is identical: simply choose the Retirement choice within the menu on the location or within the app and observe the prompts, and earlier than lengthy you’ll have your new account(s) arrange.
How Many Robinhood IRAs Can You Have?
You possibly can open one among every sort of IRA that Robinhood presents even you probably have different retirement accounts elsewhere, although you’ll nonetheless must abide by the contribution and revenue limits whatever the type and placement 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. In the event you don’t need to look forward to the cash to reach you too can choose into the IRA Instantaneous program, which helps you to immediately deposit as much as $1,000 and begin buying and selling when you’re ready to your cash to reach from the financial institution.
That’s all the fundamental 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 keen to supply a 1% match on each greenback you contribute to one among their IRAs. You don’t want an employer or something to obtain these matching funds, and so they additionally don’t depend 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 ensure that the cash isn’t simply being transferred round of their system, or perhaps they solely need recent 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 when you make a contribution to your IRA from an exterior financial institution.
It’s a reasonably good factor for Robinhood to do for its prospects. That mentioned, they solely match 1% of your contributions. That’s a penny per greenback.
In 2023 you may earn as much as $65 or $75 in matching funds when you’re below or over 50, respectively. That’s not nothing…nevertheless it’s additionally not big. Both method, 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 may earn as much as $1700 per 12 months in FREE STOCK by way of a Robinhood brokerage account!
IRA Portfolios
In the event you open an IRA with Robinhood you’ll be given the selection between a pre-built really helpful portfolio or a extra self-directed expertise.
The really helpful portfolios are comprised of 5 to eight ETFs which can be 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 may most likely assume it has one thing to do together with your funding targets, threat tolerance, and whether or not or not you’ve got ESG-style priorities to your investments.
In the event you go to the self-directed route, alternatively, you’ve got a alternative of just about every part which you could commerce on Robinhood. Meaning you’ve got an entire ton of shares, ETFs, and choices to select from, nevertheless it 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 choice of securities might depart one thing to be desired. There’s no mounted revenue, no currencies, no various belongings, nada.
And as a lot as these extra risky belongings can attraction to youthful traders with higher threat tolerance, an enormous swath of potential traders might select to open an IRA at a much bigger establishment with a extra diversified providing.
Is Robinhood Retirement Secure?
With all of the latest commotion across the banking system (we’re taking a look at you, SVB), you is likely to be questioning: are Robinhood IRAs secure?
In brief: 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 might be uninvested money in your account.
Remember the fact that the SIPC doesn’t defend you from dropping cash in case your shares go down in worth. It protects you in case your brokerage fails and you’re unable to assert 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 may earn as much as $1700 per 12 months in FREE STOCK by way of a Robinhood brokerage account!
Conclusion
Robinhood’s foray into the world of particular person retirement accounts is fascinating, to say the least. It’s straightforward sufficient to open an IRA, roll over any current retirement accounts, and handle an IRA utilizing Robinhood, nevertheless it might not be the perfect place to show to your retirement planning.
Certain, 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.
In the event you’re okay with being restricted to only these securities, nice! You’ll most likely have a good time with Robinhood’s IRAs. In the event you’re extra focused on having a well-diversified portfolio that doesn’t hinge on a number of the most risky securities on the market, alternatively, chances are you’ll 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 a bit of 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 can assist you alongside the best way, listed here are some articles answering the questions: Is Robinhood Secure? and Is Robinhood a Rip-off? Or if you wish to be taught extra about how one can earn as much as $1700 per 12 months in free inventory by referring mates, learn our article about Robinhood Free Inventory.
