The mobile-first brokerage and (Reddit-legendary) inventory buying and selling platform Robinhood not too long ago 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 achieved it anyway.
There’s no scarcity of locations to arrange an IRA—most banks, brokerages, and different monetary establishments, as an illustration—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 make cash off of their new IRAs, however do you actually need to flip to Robinhood to your retirement planning?
So what’s the take care of these Robinhood IRAs? Are they a great deal? Have they got some distinctive options or compelling purpose for patrons 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 identify).
Very similar to 401(okay)s, IRAs are primarily managed funding portfolios that get pleasure from sure tax benefits, although there are some variations.
Whereas 401(okay)s are sometimes supplied and managed by an individual’s employer, IRAs and the investments they maintain are often 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 commonest varieties: conventional IRAs and Roth IRAs.
Professional Tip:
Whenever 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’ll be able to earn as much as $1700 per 12 months in FREE STOCK by means of a Robinhood brokerage account!
Conventional IRA
A conventional IRA is actually an funding portfolio you could contribute sure quantities to yearly.
For 2022 the bounds had been as much as $6,000 ($6,500 in 2023) for folks underneath the age of fifty and as much as $7,000 ($7,500 in 2023) for folks 50 and above. Observe that these contributions apply for all IRAs that you’ve got, as in you’ll be able to solely contribute as much as $6,500 in complete 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. Whenever you retire you’ll be able to 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 if you flip 59 and a half.
Any funds that you simply withdraw will probably 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 might 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 inside a Roth IRA are additionally tax-free, and you may 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’ll be able to 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’ll be able to solely contribute to a Roth IRA in case your revenue is underneath $144,000 for a single individual or underneath $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 will probably be taxed as common revenue if you take withdrawals throughout retirement. Contributions to a Roth IRA are made with after-tax {dollars} and won’t be taxed if 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) 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 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 possibly can open considered one of every type of IRA that Robinhood presents even when you’ve got different retirement accounts elsewhere, although you’ll nonetheless should abide by the contribution and revenue limits whatever the sort 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 case you don’t need to look forward to the cash to reach you may also choose into the IRA Prompt 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 essential stuff coated. Now let’s speak about among the different options of Robinhood IRAs, beginning with the most important one.
Matching Funds
Robinhood’s greatest promoting level for his or her IRAs is that they’re keen to supply a 1% match on each greenback you contribute to considered one of 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 return from an exterior financial institution. Perhaps they need to be sure 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 if you opened your brokerage account. Who is aware of.
Regardless of the case, you’ll solely get that 1% matching funds for those who contribute 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’ll be able to earn as much as $65 or $75 in matching funds for those who’re underneath or over 50, respectively. That’s not nothing…but it surely’s additionally not big. Both approach, it’s free cash!
Professional Tip:
Whenever 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’ll be able to earn as much as $1700 per 12 months in FREE STOCK by means of a Robinhood brokerage account!
IRA Portfolios
In case you open an IRA with Robinhood you’ll be given the selection between a pre-built really useful portfolio or a extra self-directed expertise.
The really useful portfolios are comprised of 5 to eight ETFs which might 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’ll be able to in all probability assume it has one thing to do along with your funding objectives, threat tolerance, and whether or not or not you might have ESG-style priorities to your investments.
In case you go to the self-directed route, however, you might have a selection of just about every part you could commerce on Robinhood. Meaning you might 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 choice of securities could depart one thing to be desired. There’s no mounted revenue, no currencies, no various property, nada.
And as a lot as these extra risky property can attraction to youthful traders with larger threat tolerance, an enormous swath of potential traders could select to open an IRA at an even bigger establishment with a extra diversified providing.
Is Robinhood Retirement Protected?
With all of the current commotion across the banking system (we’re taking a look at you, SVB), you could 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 may be uninvested money in your account.
Take into account that the SIPC doesn’t shield you from shedding cash in case your shares go down in worth. It protects you in case your brokerage fails and you might be unable to assert your rightfully owned securities and money in your brokerage account.
Professional Tip:
Whenever 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’ll be able to earn as much as $1700 per 12 months in FREE STOCK by means 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 present retirement accounts, and handle an IRA utilizing Robinhood, but it surely will not be one of the best place to show to your retirement planning.
Positive, Robinhood’s 1% match is good. It’s greater than most IRA suppliers would provide you with.
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 case you’re okay with being restricted to only these securities, nice! You’ll in all probability have a good time with Robinhood’s IRAs. In case you’re extra desirous about having a well-diversified portfolio that doesn’t hinge on among the most risky securities on the market, however, it’s possible 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 would possibly 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 amazing thought.
That can assist you alongside the way in which, listed here 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 buddies, learn our article about Robinhood Free Inventory.
