As the April 15 tax deadline approaches, financial service providers will be falling all over themselves touting their IRA accounts and why theirs is the best solution for you. Many will offer incentives such as free trades or other benefits.
That’s all well and good, but when choosing a custodian for your IRA account, there are five additional factors that you should consider.
#1: What Is the Cost?
Depending upon the custodian and the size of your account, there may be an annual charge to have the IRA account. These fees can be all over the map, so it is best to ask any custodian you may be considering upfront what they charge.
Many custodians will waive annual fees if your account is over a specific dollar amount or if you have enough money invested with them across other accounts for you and other family members such as a spouse.
You will also want to take into account any transaction costs for trading stocks, ETFs and closed-end funds. Many custodians offer low commissions in the $7.95–$9.99 range per trade.
Some custodians may charge transaction fees for some mutual fund families, while others can be bought and sold with no transaction fee. For example, Vanguard funds and ETFs can be traded at Vanguard with no fee. Mutual funds from other families may carry a transaction fee, even if they are otherwise no-load. Other custodians such as Schwab, TD Ameritrade and Fidelity will have similar fee schedules.
#2: Is the Custodian a Good Match With Your Investing Strategy?
Various custodians offer mutual funds on their no transaction fee (NTF) platform. The question to ask, then, is this: Are these the mutual funds that you are likely to use as part of your investing strategy? Custodians like Vanguard, Schwab, T. Rowe Price and Fidelity will always offer their own funds on an NTF basis. But if your account is at Fidelity and you want to buy a Vanguard mutual fund, for example, the transaction costs can be high.
On a similar note, some custodians offer a menu of ETFs with no trading costs. Again, this is great as long as these are the best ETFs for your investing strategy.
#3: Does the Custodian Offer a Full Range of Accounts and Services?
Do your investing needs go beyond just an IRA account? Even if this isn’t the case now, it might be in the future. It is tempting to go for the absolute lowest-priced account or perhaps the biggest incentive deal to open the account. However, near-term gratification is not always the best long-term strategy.
Is this a custodian that you’d like to do business with for all or most of your investing and financial services needs? Do you have other types of investment accounts such as a taxable brokerage account or other IRAs for a spouse or other family members? Would you like to open a 529 account to save for your children’s education at some point?
Even with the IRA account, choose wisely, especially if you have several old 401(k) and IRA accounts strewn about with various custodians. It is likely to your advantage to consolidate these accounts for ease of management and to be sure that you don’t ignore any of this money.
Beyond some of the basics, do you need to put any of your accounts into a trust for estate planning purposes? Do you need to open a self-employed retirement account such as a Solo 401(k) or a SEP IRA?
The point of all of this is to consider choosing a custodian that fits your overall investing needs — not just now, during IRA season, but long term. Having all or most of your accounts in one place can make life simpler and can provide some advantages in terms of buying power.
#4: Can the Custodian Handle Complex Transactions?
Much of what you will do in your IRA is likely to be pretty straightforward investing. Maybe you will buy some shares of stock, a mutual fund or an ETF. But sometimes your needs will go beyond this. And in some cases, the rules surrounding certain IRA transactions are complex. A custodian that is not equipped to handle these types of more complex transactions can get them wrong, which can cost you dearly in terms of unwanted taxes and — possibly — penalties.
For example, an inherited IRA is fraught with opportunities for errors. If your custodian doesn’t understand this type of IRA, things can go wrong.
And the 72(t) rules for substantially equal withdrawals prior to age 59½ are so complex that many custodians refuse to offer any assistance.
You may never need a custodian to help with an inherited IRA or any other complex IRA transaction. But in the event you do, it can pay to deal with a custodian with the resources and expertise to assist you. This might be more important for those of you a bit closer to or already in retirement.
#5: What About IRA Promotions?
Just because a promotion shouldn’t be your sole reason for choosing an IRA custodian, that doesn’t mean you should ignore IRA promotions. If you can find the right custodian with the right mix of services, investment options and fees, why not take advantage of a promotion if they offer one?
Often these promotions include such things as a cash bonus, free trades for a period of time or other benefits that might save you money.
Choosing the right custodian for your IRA is important, as this is a place where your retirement savings will be invested for a comfortable retirement. IRAs are about more than just current contributions; they often end up as a repository for rollovers from employer-sponsored retirement plans.
Look at everything a prospective custodian offers beyond just the IRA account you are looking to open, and make the best, most informed decision possible.