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, as an example—so Robinhood throwing its feathered cap into the ring is type of curious.

Clearly they suppose they’ve some distinctive worth proposition or see a chance to generate income 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 motive 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, slightly 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(ok)s, IRAs are basically 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 normally managed by their homeowners. There are additionally barely totally different tax implications between 401(ok)s and IRAs, however we gained’t get into all that right here.

IRAs are available a number of flavors, although Robinhood solely presents the 2 commonest sorts: conventional IRAs and Roth IRAs.

Professional Tip:

Once 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 via 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 boundaries had been as much as $6,000 ($6,500 in 2023) for folks below the age of fifty and as much as $7,000 ($7,500 in 2023) for folks 50 and above. Word that these contributions apply for all IRAs that you’ve got, 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. Once 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 whenever you flip 59 and a half.

Any funds that you simply withdraw will likely be taxed like common earnings. You can 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 may allow you to keep away from that 10% penalty, that will get into some thorny tax territory that may be neither helpful nor attention-grabbing to get into.

Roth IRA

Roth IRAs are slightly 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.

1. You can’t deduct any contributions you make to a Roth IRA, however you can withdraw these contributions (however not positive factors) at any time with out incurring a penalty
2. There are earnings limits related to Roth IRAs
   1. For 2022 you possibly can solely contribute to a Roth IRA in case your earnings is below $144,000 for a single particular person or below $214,000 if submitting collectively
   2. For 2023 the earnings limits are raised to $153,000 and $228,000, respectively

TO SUMMARIZE:

Contributions to a conventional IRA are tax deductible, and will likely be taxed as common earnings whenever you take withdrawals throughout retirement. Contributions to a Roth IRA are made with after-tax {dollars} and won’t be taxed whenever you take withdrawals throughout retirement. You don’t pay taxes in your capital positive factors 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) presents 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 location 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 one in all every form of IRA that Robinhood presents even in case you have different retirement accounts elsewhere, although you’ll nonetheless must abide by the contribution and earnings limits whatever the form and site 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 wish to anticipate the cash to reach it’s also possible to decide into the IRA Prompt program, which helps you to immediately deposit as much as $1,000 and begin buying and selling whilst you’re ready to your cash to reach from the financial institution.

That’s all the fundamental stuff coated. Now let’s speak about among 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 present a 1% match on each greenback you contribute to one in all 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 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 ensure that the cash isn’t simply being transferred round of their system, or possibly they solely need recent new cash as a substitute of the identical outdated cash you gave them whenever you opened your brokerage account. Who is aware of.

Regardless of the case, you’ll solely get that 1% matching funds if you happen to contribute to your IRA from an exterior financial institution.

It’s a reasonably good factor for Robinhood to do for its clients. 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 if you happen to’re below or over 50, respectively. That’s not nothing…nevertheless it’s additionally not large. Both means, it’s free cash!

Professional Tip:

Once 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 via a Robinhood brokerage account!

IRA Portfolios

In case you open an IRA with Robinhood you’ll be given the selection between a pre-built beneficial portfolio or a extra self-directed expertise.

The beneficial portfolios are comprised of 5 to eight ETFs which can be 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 targets, threat tolerance, and whether or not or not you may have ESG-style priorities to your investments.

In case you go to the self-directed route, alternatively, you may have a alternative of just about all the pieces which you can commerce on Robinhood. Meaning you may have 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 fastened earnings, no currencies, no various belongings, nada.

And as a lot as these extra risky belongings can enchantment to youthful buyers with larger threat tolerance, an enormous swath of potential buyers might select to open an IRA at an even bigger establishment with a extra various providing.

Is Robinhood Retirement Protected?

With all of the current commotion across the banking system (we’re you, SVB), you may 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.

Needless to say 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’re unable to say your rightfully owned securities and money in your brokerage account.

Professional Tip:

Once 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 via 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 straightforward sufficient to open an IRA, roll over any current retirement accounts, and handle an IRA utilizing Robinhood, nevertheless it will not be the very best 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 similar 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 simply these securities, nice! You’ll in all probability have a good time with Robinhood’s IRAs. In case you’re extra focused on having a well-diversified portfolio that doesn’t hinge on among the most risky securities on the market, alternatively, it’s possible you’ll 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 slightly 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 ideal thought.

That will help 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 be taught 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.