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 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, for 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 a living off of their new IRAs, however do you actually wish to flip to Robinhood to your retirement planning?
So what’s the cope with these Robinhood IRAs? Are they an excellent deal? Have they got some distinctive options or compelling cause for purchasers to put money into their IRAs, or would shoppers be higher off choosing an IRA from a extra established monetary establishment?
Let’s dive in. However first, a little bit 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 like 401(ok)s, IRAs are primarily managed funding portfolios that get pleasure from sure tax benefits, although there are some variations.
Whereas 401(ok)s are sometimes supplied and managed by an individual’s employer, IRAs and the investments they maintain are often managed by their house owners. There are additionally barely totally different tax implications between 401(ok)s and IRAs, however we received’t get into all that right here.
IRAs are available in a number of flavors, although Robinhood solely affords the 2 most typical 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 possibly can earn as much as $1700 per yr in FREE STOCK by a Robinhood brokerage account!
Conventional IRA
A conventional IRA is basically an funding portfolio which you can contribute sure quantities to yearly.
For 2022 the bounds have 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. Be aware that these contributions apply for all IRAs that you’ve, as in you possibly can 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 possibly can withdraw funds from an IRA and have them taxed as common earnings, 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 once you flip 59 and a half.
Any funds that you simply withdraw can be taxed like common earnings. 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 prime of any earnings taxes you owe.
And whereas there are some circumstances that can allow you to keep away from that 10% penalty, that will get into some thorny tax territory that will be neither helpful nor attention-grabbing to get into.
Roth IRA
Roth IRAs are a little bit 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 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 features) at any time with out incurring a penalty
There are earnings limits related to Roth IRAs
For 2022 you possibly can solely contribute to a Roth IRA in case your earnings is underneath $144,000 for a single particular person or underneath $214,000 if submitting collectively
For 2023 the earnings limits are raised to $153,000 and $228,000, respectively
TO SUMMARIZE:
Contributions to a standard IRA are tax deductible, and can be taxed as common earnings once you take withdrawals throughout retirement. Contributions to a Roth IRA are made with after-tax {dollars} and won’t be taxed once you take withdrawals throughout retirement. You don’t pay taxes in your capital features or dividend earnings 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) affords each conventional and Roth IRAs. The method for establishing 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 sort of IRA that Robinhood affords even in case you have different retirement accounts elsewhere, although you’ll nonetheless need to abide by the contribution and earnings limits whatever the type and placement of your IRAs.
Anyway, upon getting your IRA(s) arrange you can begin transferring in cash out of your brokerage account and/or exterior financial institution accounts. For those who don’t wish to anticipate the cash to reach you can even 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 lined. Now let’s speak about a few of the different options of Robinhood IRAs, beginning with the largest one.
Matching Funds
Robinhood’s greatest promoting level for his or her IRAs is that they’re keen 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 yr.
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. Possibly they wish to be certain that 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 once you opened your brokerage account. Who is aware of.
Regardless of the case, you’ll solely get that 1% matching funds in case 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 possibly can earn as much as $65 or $75 in matching funds in case you’re underneath or over 50, respectively. That’s not nothing…but it surely’s additionally not big. Both means, 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 possibly can earn as much as $1700 per yr in FREE STOCK by a Robinhood brokerage account!
IRA Portfolios
For those who open an IRA with Robinhood you’ll be given the selection between a pre-built advisable portfolio or a extra self-directed expertise.
The advisable portfolios are comprised of 5 to eight ETFs which are chosen by Robinhood’s algorithm primarily based 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 in all probability assume it has one thing to do along with your funding objectives, threat tolerance, and whether or not or not you’ve gotten ESG-style priorities to your investments.
For those who go to the self-directed route, alternatively, you’ve gotten a alternative of just about every part which you can commerce on Robinhood. Which means you’ve gotten a complete 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 unstable number of securities could depart one thing to be desired. There’s no mounted earnings, no currencies, no different belongings, nada.
And as a lot as these extra unstable belongings can enchantment to youthful traders with higher 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 latest commotion across the banking system (we’re you, SVB), you could be questioning: are Robinhood IRAs protected?
Briefly: sure, Robinhood IRAs are protected.
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.
Remember the fact that the SIPC doesn’t shield you from dropping cash in case your shares go down in worth. It protects you in case your brokerage fails and you might be unable to say 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 possibly can earn as much as $1700 per yr in FREE STOCK by a Robinhood brokerage account!
Conclusion
Robinhood’s foray into the world of particular person retirement accounts is attention-grabbing, 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 might not be the most effective place to show to 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 put money into something past equities and choices.
For those who’re okay with being restricted to only these securities, nice! You’ll in all probability have a good time with Robinhood’s IRAs. For those who’re extra eager about having a well-diversified portfolio that doesn’t hinge on a few of the most unstable securities on the market, alternatively, you could wish 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 wish to get to know them a little bit higher. And that’s completely comprehensible.
If you wish to do some extra analysis into whether or not or not Robinhood is protected and dependable, that’s an awesome thought.
That can assist 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 yr in free inventory by referring buddies, learn our article about Robinhood Free Inventory.