Investment in a Roth IRA Brokerage Vs. Mutual Funds


A Roth IRA account allows you to build up money tax-free for retirement, and take qualified withdrawals of that money with no federal income tax liability. When you open a Roth IRA, you can use a brokerage firm or a mutual fund company. Both approaches have their advantages, and it is important to look at a number of factors, from administrative fees and trading costs to investment choices, when choosing a Roth IRA administrator.

Administrative Fees

Both brokerage firms and mutual fund companies can charge administrative fees for Roth IRA accounts, especially on small accounts. Before you open a Roth IRA with any firm, you should find out what kinds of fees are charged. Some firms charge a quarterly fee to administer Roth IRA accounts under a certain size, while others make an annual assessment. Other firms do not charge an administrative fee at all, and finding one of those low-cost firms can keep your expenses down and give you more money to invest.

Available Investments

The advantage of opening a Roth IRA account with a brokerage firm is that you can use the account to buy and sell individual stocks. A Roth IRA is a good vehicle for stock trades, since you will not have to pay income taxes on the profits you make within the fund. In addition, some brokerage firms allow customers to buy and sell mutual funds and exchange-traded funds. If you think you want to include individual stocks in your Roth IRA, a brokerage firm would be the better choice. If you prefer to stick with mutual funds, choosing a low-cost mutual fund family would be the better move.

Brokerage Fees

One downside of using a brokerage firm for your IRA is that you have to pay a brokerage fee every time you buy or sell an investment. These brokerage fees can really add up, especially if you are just getting started and only have a small balance in your account. Some brokerage firms, however, do offer commission-free trades on exchange-traded funds, so if you plan to use exchange-traded funds in your portfolio, your costs could be lower. When you invest your Roth IRA with a mutual fund company, you can add to your account at any time without incurring any additional costs.

Balance Requirements

Brokerage firms often have higher minimum balance requirements than mutual fund companies, so you may need to start out with a mutual fund account. Some mutual fund companies let you open a Roth IRA account with as little as $250 to $500, while brokerage firms tend to require more money to open the account. It is important to research the minimum balance requirements of each firm you are considering and make your choice accordingly.

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