A few days ago, I received an email from Betterment notifying me that I had maxed out my Roth IRA for the year. It marks the third year in a row that I’ve maxed out my Roth IRA.Maxing out my Roth IRA might not seem like all that big a deal, but I think it is when you consider that three years ago, I didn’t even know what a Roth IRA was, let alone how to start or invest in one. At the time, the only investing I had done was a small, automatic contribution from my paycheck to my firm’s 401k – the default amount that my firm opted everyone into unless you specifically opted out.
When I did eventually get around to starting my Roth IRA, I went with the robo-advisor route. I chose to use Betterment since it had a low minimum contribution amount, the fees were reasonable and transparent, and the interface was straightforward and intuitive. Even though I had read that it was slightly more expensive to use a robo-advisor and every investing person online said I could do the same thing myself without the added fees, the ease of opening up a Roth IRA using a robo-advisor made it worth it. Plus, I found comfort in knowing that my contributions were being properly invested by a fiduciary.
After three years and $16,500 in contributions, I’ve now outgrown my Betterment account (at least when it comes to my Roth IRA). While the 0.25% management fee that Betterment charges isn’t very high, I’ve learned enough about investing and have enough saved up that I don’t really need the robo-advisor element anymore. As a result, this year, I’ll be transferring all of my Roth IRA funds directly over to a Roth IRA with Vanguard. The move should cut my overall fees down from somewhere in the 0.35% range all the way down to 0.04%. It’s a pretty big cost savings over the long term.
Though I’ve outgrown my Betterment account, when new investors ask me where they should set up their Roth IRA, I still generally say to start with a robo-advisor – Betterment or Wealthfront, in particular.
The way I see it, when it comes to a Roth IRA, start with Betterment or Wealthfront. Graduate to Vanguard later.
*Note: This post isn’t an advertisement for either Betterment or Wealthfront. Indeed, I haven’t even included any affiliate links in this post. I simply suggest these two because they both are low cost, have low minimum deposit requirements, and allow you to transfer to another brokerage later down the line for free.
Start Your Roth IRA With A Robo-Advisor Like Betterment or Wealthfront
For a lot of us in the personal finance/financial independence community, investing seems pretty simple – invest in low-cost index funds that match the market, save a huge percentage of our income, and let that money grow over time.
As easy as we like to think it is, the actual process of investing isn’t all that easy for the new investor. I know this because I was in that position once too. It took me a while to learn this stuff. And even now, a lot of you took for granted that you understood what I wrote in the previous paragraph. For someone like me three years ago, that last paragraph might as well have been gibberish.
It’s this lack of knowledge that I think slows people down with investing. Just telling someone that they should go and open up a Roth IRA or other retirement account isn’t enough. A retirement account isn’t like opening up a savings account, where you can just go do it and then put money into it. There’s much more that can trip someone up along the way – questions like:
- Where do you open a Roth IRA?
- How do you put money into it?
- What happens once that money goes in?
- How do you invest it?
- How much do you need in order to invest?
- What does it cost?
Throw that list of questions in someone’s face and most likely, they’ll just decide not to do it at all.
That’s why I’ve always been a huge fan of robo-advisors and why I started out my investing life with one. They answer those questions for you. All I had to do was open an account, deposit money into it, and then the robo-advisor (Betterment in my case) did the rest for me.
Move Your Roth IRA Directly Into Vanguard After A Few Years
What makes the robo-advisor route so helpful for the new investor starting out with their Roth IRA are the fees that aren’t charged.
Let’s look at management fees. Management fees are the main problem most people have with going the robo-advisor route. The nice thing though is that there are robo-advisors that will manage the first $5,000 or $10,000 you invest for free (Wealthfront, in particular). Since Roth IRA’s are naturally limited in how much you can put into it in a year, it’ll take you 1 or 2 years before you’re in a position where you’re even getting charged a management fee. By that point, you can go ahead and move your funds directly to Vanguard, if you want.
The other fees to consider are closing or transfer fees. One issue with starting with one brokerage account and then moving to another account is that you’ll often get charged fees to transfer your funds to another brokerage. That makes picking the right brokerage sort of important.
Robo-advisors, on the other hand, seem to be different. When I was looking to move my Roth IRA out of Betterment, I did a little research to see if I’d have to pay any fees to do so and was pleasantly surprised to see that there were absolutely no fees to move my money over to another company (see the below excerpt from Betterment’s FAQ):
Wealthfront has the same policy as well – no fees to transfer your account from Wealthfront over to another broker.
What this means for you is that its easy enough to start your Roth IRA with a robo-advisor first, just like I did. You’ll pay either zero or very minimal management fees on a small amount of money. After a few years, you’ll have $10,000 or more saved up in your Roth IRA. At that point, you can just transfer it out and go with investing directly with Vanguard.
Suggested Robo-Advisors To Start Out With
So which robo-advisors do I recommend? I see two that make this tactic of starting with a robo-advisor, then moving to investing directly with Vanguard worthwhile.
- No fees to transfer your funds over to another brokerage.
- No minimum investment, which means you can get started with investing right away.
- The management fee is 0.25% starting with your first dollar, which is reasonable.
- Again, no fees to transfer your funds over to another brokerage.
- There is a $500 minimum investment, which is a slight barrier to entry.
- The management fee is 0.25% but is waived for the first $10,000, which makes it pretty perfect for starting out your Roth IRA.
If I could go back in time, I probably would have set up my first Roth IRA with Wealthfront, simply because of the free management on that first $10,000 (really $15,000 since, if you use anyone’s referral link, you get another $5,000 managed for free – feel free to Google for one or hit me up if you need one).
Most people will take around 3 years to get $15,000 into a Roth IRA, so it’s basically the perfect spot to get started and use this tactic of starting with a robo-advisor, then moving on to investing directly with Vanguard later.
Robo-Advisor Fees Aren’t Forever
You’ll hear from a lot of experts who tell you that you can do all of the stuff that a robo-advisor does on your own for free – and they’re absolutely right. But doing it yourself naturally increases friction, which makes it harder to get started.
Instead, I think it’s better to get started right away with a robo-advisor, then move those funds to Vanguard once you’ve figured out what you’re doing and have a little bit of money saved up. Even if you pay any management fees to a robo-advisor on your Roth IRA, it’s not forever. Sure, I paid three years worth of management fees to Betterment – three years that I probably didn’t need to pay any fees. Three years, though, isn’t a ton of time in the grand scheme of things.
So, I’ll be doing two things this year when it comes to my Roth IRA. First, I’ll be moving my Roth IRA contributions directly into Vanguard. With three years of contributions and a long bull market, my Roth IRA is now standing at a little over $21,000. I’ll likely be dumping it all into a Vanguard Total Stock Market Fund (VTSAX) just to keep things simple. Transferring my funds into Vanguard shouldn’t be difficult either – companies are always willing to help you get money to them, so it’ll just be a matter of opening up my Roth IRA and figuring out some directions.
The second thing I’ll be doing is opening up a Roth IRA for my wife and getting as much as we can into her Roth IRA for tax-year 2017. We’ll be opening up her Roth IRA with Wealthfront since the first $10,000 is managed for free and it only requires $500 to get started.
In a few years (possibly even this year), our income will be too high to directly contribute to a Roth IRA, at which point, we’ll have to start utilizing a backdoor Roth (a topic for another post). I’m not quite sure if robo-advisors can work with backdoor Roths, although I don’t see why they wouldn’t. It’d just require a little more manual work. I’ll probably follow up on that topic in a future post one day if my income ever gets to that point and I’m still robo-advisoring it up.
Anyway, that’s the strategy I recommend for anyone starting out their Roth IRA investing journey – go with a robo-advisor first, then move those funds into Vanguard later. It’s an easy way to get your investing life off to a good and easy start.