Sunday, August 14

Fidelity vs. Charles Schwab: Which IRA is best for you?

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Fidelity vs. Charles Schwab IRAs: The biggest differences

Fidelity and Charles Schwab both offer wealth-building products for all types of investors. On the IRA side, you can use either platform to set up accounts like traditional, Roth, rollover, SEP, or SIMPLE IRAs. And both brokerages allow you to automate certain IRAs.

However, Schwab is the best choice for those who want more options for their retirement accounts.

Fidelity offers a Roth IRA for Kids account, but Schwab’s custodial IRA lets you set up either a traditional or Roth IRA for a minor. Plus, Schwab’s two automated accounts — Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium — supported traditional, Roth, rollover, SEP and SIMPLE IRAs. Fidelity’s automated accounts only support traditional, Roth, and rollover IRAs.

But Fidelity is a better option for retirement investors in search of lower fees for investments, as it offers several zero expense ratio index mutual funds. Fidelity’s advisor-assisted, automated account is also better for those with lower balances.

Fidelity and Schwab’s fees and features also vary.

IRA eligibility requirements

Overall, Fidelity and Charles Schwab offer many of the same IRAs, but it’s important to pay attention to the following eligibility requirements for each account:

  • Traditional IRA: You have to be at least 18 years old with taxable income to set up a traditional IRA. If you’re under age 50, you can contribute a maximum of $6,000 per year (those 50 and older can contribute $7,000) in pre-tax dollars . In other words, you aren’t taxed on your contributions until you withdraw from the account. The earliest you can make withdrawals is age 591/2.
  • Roth IRA: The eligibility requirements are the same for the traditional and Roth IRAs. Contributions to a Roth IRA, however, are post-tax. This means that you won’t have to pay taxes on any earnings once you’re eligible to withdraw at age 591/2. But you still have to meet certain income requirements to make the full contribution (eg, single filers can contribute the full $6,000 or $7,000 if their modified adjusted gross income (MAGI) is less than $125,000).
  • Roth IRA for Kids (available through Fidelity): You can use this retirement account if you’re under the age of 18 and have employment compensation. The $6,000 maximum contribution rule also still holds, but Fidelity doesn’t let you contribute any more than you earn in a year.
  • Custodial IRA (available through Schwab): With a custodial IRA, parents or guardians (also known as the account’s custodian) can set up traditional or Roth IRAs for minors. The custodian manages the IRA until the child reaches their state’s age of majority (typically 18 or 21). One major perk of these IRAs is that they allow for penalty-free withdrawals (ie, you won’t face a tax penalty if you need to pull out money for things like education costs).
  • Inherited IRA: These accounts are for those who’ve inherited employer-sponsored plan assets or IRA assets — eligible IRAs include Roth, traditional, rollover, SEP, and SIMPLE IRAs — from a deceased individual. You won’t be able to make extra contributions to the IRA, but Schwab says the funds in the account can remain tax-deferred while generally allowing you to make withdrawals without penalty.
  • SEP IRAs: Small businesses and self-employed individuals are most fit for SEP IRAs. Like traditional IRAs, the earnings in the account can grow tax-deferred and won’t incur any taxes until you make withdrawals. Small businesses can contribute up to 25% of compensation, while self-employed individuals have a limit of 20% (the maximum amount you can contribute for the 2021 tax year is $58,000).
  • SIMPLE IRAs: These IRAs apply to self-employed individuals or small businesses with no more than 100 employees. Employees can make contributions as long as they’ve earned at least $5,000 from the employer in the past two years and expect to receive at least $5,000 in the current year. You can contribute up to $13,500 in 2021 (those 50 or older can contribute $16,500).

Are Fidelity’s IRAs right for you?

Fidelity currently offers traditional IRAs, Roth IRAs, rollover IRAs, Roth IRAs for Kids, SEP IRAs, and SIMPLE IRAs.

On the self-directed side, each of its IRAs have no account minimums or fees, and all of them include commission-free trading on stocks and ETFs (SEP IRAs and the Roth IRAs for Kids account additionally allow commission-free options trading).

If you’re more of a beginner or hands-off investor, you can also set up traditional or Roth IRAs with Fidelity Go or Fidelity Personalized Planning & Advice. These accounts will cost you, though. You won’t need a minimum account size for Fidelity Go, but you can pay $0, $3/month, or 0.35%/year in advisory fees.

The Fidelity Personalized Planning & Advice account includes both automated portfolio management and advisor oversight, but you’ll need a minimum of $25,000, and you’ll incur a 0.50% advisory fee (the Schwab equivalent also has a $25,000 minimum, but its $30/ month advisory fees are comparatively more expensive for those with balances under $72,000).

The Fidelity Personalized Planning & Advice becomes more expensive than the Schwab account once you pass the $72,000 threshold. This is because Fidelity charges a 0.50% asset-based fee, while Schwab charges a constant $30/month fee. If you deduct 0.50% from $72,000 (excluding any investment fees), you’ll get the same $360 result you would if you calculated a year’s worth of Schwab’s $30/month premium fees.

Fidelity also provides several low-cost investments. It offers zero

expense ratio
index funds, thousands of no-transaction-fee funds, more than 7,000 commission-free stocks and ETFs, and much more.

You’ll additionally find that there’s no shortage of resources at Fidelity. The brokerage offers 24/7 customer support, online courses and guides through the Fidelity Learning Center, and market research and insights.

Are Charles Schwab’s IRAs right for you?

Schwab also provides a competitive selection of IRAs. Whether you’re an individual with taxable income, a small business, or a self-employed individual, the brokerage has an IRA for you. Schwab currently offers traditional IRAs, Roth IRAs, rollover IRAs, SEP IRAs, SIMPLE IRAs, inherited IRAs, and custodial IRAs.

And like Fidelity, Schwab also has thousands of no-transaction-fee mutual funds. It currently offers more than 4,000. However, Fidelity is the better choice when it comes to zero expense ratio funds. But Schwab makes up for this with its suite of mutual fund tools.

It has a Fund Finder that helps you identify mutual funds that best fit your preferences. Schwab also offers a pre-defined mutual fund screener, and you can use its comparison tool to simultaneously compare up to five mutual funds.

In addition, Schwab offers its own set of mutual funds that the brokerage itself manages. These include index funds, active equity funds, bond funds, and asset allocation funds. And in total, it provides more than 2,000 index mutual funds and ETFs (200 of its index mutual funds have no transaction fees, and all of its index ETFs have $0 commissions).

Unlike Fidelity, both Schwab’s Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium accounts allow you to automate inherited IRAs, SEP IRAs, and SIMPLE IRAs. Fidelity’s automated accounts only allow traditional, rollover, and Roth IRAs.

Each Schwab IRA additionally includes commission-free trading, 24/7 customer support, retirement planning calculators and resources, market insights, and access to more than 300 Schwab branches.